Getting a 2nd Business Loan
There may come a time when you find your small or mid-sized business needing to obtain capital. Your worry is that since you already have a loan in place, that no lender will be able to help you meet your operating capital needs. Thankfully there are options for company’s that currently have a loan in place and are looking to obtain a 2nd (or maybe even a 3rd) loan to help you with your business goals. Knowing the options available may mean the difference between having to struggle to pay bills, and finding the right funding to help during the slower points in the business cycle.
To first understand how to obtain additional business financing, its important to first look at the processes that took place with your last loan.
What is a Lien?
A lien is a way for a lender or creditor to let another potential borrower know that you, as the first lenders, have first rights at business and/or personal assets should the borrower default on their loan to you. In fact, from a legal perspective, being an a 1st position gives you the right to liquidate all assets and sell until you have been fully-repaid your debt. Any additional lenders that follow you will subordinate to you because you have placed the first lien on the company – therefore giving you first rights to collect assets.
What Does “Senior Position” or “First Position” Mean?
Senior lenders are simply lenders who supply loans in which business collateral is pledged, and no other lender or debt financing company is in a position to collect before you. A senior loan must only be provided to companies that don’t have any existing business loan debt and possibly other debt. Senior and first position lenders reduce their risk by being in a position to have first grabs at assets should the borrower fail to repay, therefore they tend to offer rates that are better than subordinated lenders, along with longer terms.
What are the Types of Senior Position Loans?
Virtually any type of business loan can be a 1st position loan if the company that is borrowing doesn’t have any existing loans in place. So loan doesn’t need to be from a traditional source, or have a low-rate APR in order to be in the first position. It simply has to place a lien and lend to a company without any other loans or financing vehicles being in place. With that having been said, the most common type of first position loan is usually conventional financing you would find from a bank or credit union. These lenders almost exclusively only lend in the first position. SBA loans are also first position loans, as they are required to always be in a superior position to other types of debt financing. Alternative loans can be first position loans if the company doesn’t qualify for a traditional financing. Even a merchant cash advance can be in the first position if that borrower only has that advance in place.
What Does Subordinate Mean?
Subordinate just means that the lender who is an additional position (lender who loans after the first lender has placed a lien on the company when providing funding) will be rank below another lender. A lender that subordinate naturally takes more risk, because they have less of a chance of being fully-repaid that the senior lender. Because of this risk, a subordinate lender will generally have higher rates than a first position or senior lender, as well as have much shorter terms.
What are the Types of Subordination Loans?
| Types | Rates | Terms | Funding |
|---|---|---|---|
| Asset Based | 10-30% | 1 – 3 years | 7-30 days |
| Alternative | 6-25% | 1-5 years | 5-7 days |
| Cash Advance | 1.16-1.55 | 3-24 months | 1-3 days |
From a general standpoint, subordinated loan generally come from alternative financing sources. While a traditional lender may find a way to work in a 2nd mortgage to a company’s commercial real estate, chances are a bank isn’t going to provide a 2nd position loan. With that having been said, many alternative lenders are perfectly willing to subordinate to the right lender. A mid prime or marketplace lender will usually only subordinate to a bank or SBA lender. They will not subordinate to another online lender. An asset based lender may subordinate to a bank or SBA lender by collateralizing accounts receivable or commercial real estate. A merchant cash advance lender will almost always subordinate to both a bank and to a fintech lender. Even more, there are certain cash advance lenders that will stack a 2nd, 3rd, 4th or even 5th position behind other merchant cash advance funders.
What are the Uses of Subordinated Loans?
Uses for these loans can be for just about any business need you can think of including:
- Working capital
- Making Payroll
- Hiring employees
- Advertising
- Paying taxes
- Paying rent or mortgage
- Paying vendors
- Purchasing inventory
How to Get the Right Subordinated Loan For Additional Funding?
The key to getting the best 2nd lien loan is to understand all the options and not settling for financing that is simply easy to obtain. Fact is, easy money tends to be expensive money. Getting the best 1st position loan the first time around is always key. Make sure you get a loan – not for the minimum amount – but for enough to handle all of your business needs and then some. It’s a lot easier – and cheaper – to get the first amount of financing with your first loan, than it will be to add a second business loan to your expenses.
But when you start looking for additional financing, make sure to start with the healthiest choices first. During the process of looking and comparing, you’ll find a number of funding options that promise an easy, quick and painless funding process, with almost 100% approval guaranteed. All of those are probably true. But in return for making the process easy, and because these funders will provide financing to nearly any borrower, regardless of credit history, you can expect to see extremely high rates, very short terms, and expensive fees. So do you research and don’t settle until you find the right loan.
