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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Subordination

What does it mean to subordinate a shareholder loan to the bank?

ONE OF 80 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Subordination is an agreement that one creditor's claim ranks behind another's — most often, that money the owners have lent their company will not be repaid until the bank has been. A lender asks for it so that a director's loan behaves like equity: it stays in the business, supports the balance sheet, and cannot be withdrawn ahead of the bank when cash is tight. It is usually done by deed, and it often appears in a facility letter as a condition precedent.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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