Subordination is the contractual ranking of one creditor's claim behind another's in the line for repayment. In SBA acquisitions the seller's note is subordinated to the bank, meaning the bank is repaid first if the business defaults or is liquidated.
Worked example
| Position | Lender | Amount |
|---|---|---|
| Senior (paid first) | SBA 7(a) bank | $900,000 |
| Subordinated (paid after bank) | Seller note, full standby | $150,000 |
The seller signs SBA Form 155 subordinating their note behind the bank; on full standby they collect nothing until the bank is made whole.
Why it matters when buying a business
Subordination is what makes seller financing work alongside an SBA loan. Because the seller note sits behind the bank, often on full standby, the lender treats it almost like equity, which can lift your DSCR and shrink the cash you bring. Sellers should understand they are last in line before agreeing.
