A subordinated loan agreement is a legal funding arrangement in which the borrower avails some loans from the lender and the loan is subordinated to a senior debt. Under this arrangement the loan being availed is subordinated to a senior debt implying that in case of default, bankruptcy or liquidation arrangements would be first made to repay the senior debt and then the subordinated loan will be repaid.
These type of loans are put on low priority and have a high risk factor attached with them and so are availed at higher rate of interests and the lenders in this case generally are the promoters, directors of a company. A subordinated loan agreement would generally consist of the clauses pertaining to amount of loan, the interest rate, the repayment plan, and the amount of senior debt which would take precedence over this loan, the subordination clauses, the penalties and legal recourse available in event of default of the company.
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