If you are looking to secure financing for your business, you may have heard the term “subordination agreement” thrown around. While it may sound like a complicated legal document, it’s actually a simple concept that can have a big impact on your ability to obtain funding.

So, why do you need a subordination agreement?

First, let’s define what a subordination agreement is. Essentially, it’s a document that allows one creditor to take priority over another creditor in the event of non-payment or default. This means that if you have multiple loans or lines of credit, the creditor that has a subordination agreement in place will be paid first in the event of a default.

Now, let’s look at some specific reasons why a subordination agreement may be necessary:

1. To secure additional financing

If you already have outstanding loans or lines of credit, a lender may require a subordination agreement in order to provide you with additional financing. This is because they want to ensure that they will be the first creditor to be repaid in the event of default.

2. To avoid default

If you have multiple creditors and are struggling to make payments, a subordination agreement can help you avoid default. By prioritizing one creditor over another, you can ensure that you are making payments to the most important creditor first.

3. To protect collateral

If you have provided collateral to multiple creditors, a subordination agreement can help ensure that the most important creditor has priority over that collateral. This can be especially important in the event of default, as it will ensure that the most important creditor has the first claim to the collateral.

4. To reduce interest rates

If you have multiple loans with different interest rates, a subordination agreement may be necessary to reduce those rates. By prioritizing one creditor over another, you may be able to negotiate a lower interest rate on the subordinate loan.

In short, a subordination agreement is an important document that can help you secure financing, avoid default, protect collateral, and reduce interest rates. If you are considering taking on additional debt, it’s important to understand the role that a subordination agreement can play in the process. Working with a qualified attorney can help ensure that you fully understand your options and can make informed decisions about your financial future.