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Subordination agreement
Also called sub agreement, intercreditor subordination.
The signed document by which one creditor accepts a position behind another, specifying which obligations and which collateral it covers and what the junior party may still do.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
The operative terms are narrower than people assume. A well-drafted agreement identifies the senior debt by amount and describes what happens if that amount increases; identifies the collateral it covers, which may be all assets or only accounts receivable; states whether the junior creditor may continue receiving regular payments while the senior loan performs; and sets standstill provisions barring the junior from enforcing for a period after a senior default.
It is signed by the two creditors, usually with the borrower acknowledging. The borrower is not a party to the bargain being struck, which is why the borrower cannot compel it.
A blanket subordination and a collateral-specific one are very different instruments. An equipment lender may happily subordinate as to accounts receivable while keeping first position on its machines. A funder holding an all-assets filing over a business whose only real asset is receivables is being asked to give up everything.
Where this one catches people
Signing a subordination does not extinguish the junior creditor's claim, and it usually does not stop them being paid in the ordinary course. Business owners read a subordination as though the junior lender has been dealt with. It has been reordered, not removed — it can still enforce once any standstill expires, and the underlying debt is unchanged.
Where you will meet this term
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Subordination agreement — common questions
What does subordination agreement mean?
The signed document by which one creditor accepts a position behind another, specifying which obligations and which collateral it covers and what the junior party may still do.
Where does subordination agreement catch people out?
Signing a subordination does not extinguish the junior creditor's claim, and it usually does not stop them being paid in the ordinary course. Business owners read a subordination as though the junior lender has been dealt with. It has been reordered, not removed — it can still enforce once any standstill expires, and the underlying debt is unchanged.
Is subordination agreement the same as an interest rate?
Subordination agreement is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does subordination agreement apply to?
Business Line of Credit, SBA Loan, Invoice Financing, Asset-Based Lending.
Is there a worked example of subordination agreement?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside subordination agreement?
Intercreditor agreement, Senior lien, Standby agreement, Subordination, UCC termination.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.