Subordinated loan: funding your SME without selling shares

A subordinated loan is a loan repaid after the company's other debts if it gets into trouble. That rank makes it riskier for the lender, so it is better paid, but it leads the bank to treat it as quasi-equity. It funds a project without creating any shares: you keep 100% of your capital.

My argument fits in one sentence: for a profitable SME whose owner does not want a partner, the subordinated loan is often the most useful instrument on the market, and the least requested. I will defend that, then put the serious objection to it, then qualify it.

What is a subordinated loan?

It is an ordinary loan agreement with a subordination clause added. In a liquidation or a crisis, the lender agrees to be repaid after the so-called senior creditors, the bank first of all.

Nothing else sets it apart from a bank loan. No shares are issued, no voting rights, no entry in the share register. But its parameters vary a lot from one lender to the next:

Neighbouring terms muddy the picture. A convertible loan can become shares, often at the next round. Mezzanine is a more expensive subordinated instrument with access to equity, common in debt-financed buyouts. A participating loan makes part of the return depend on results. These words overlap. The contract decides: rank, return, term, conversion.

Why does the bank treat it as equity?

Because it takes the hit before the bank does.

From 2009 to 2017, I assessed business loans at a bank in Namur. When a balance sheet contained a subordinated loan, I took it out of debt and added it back to equity in my analysis spreadsheet. Not out of generosity. In a bankruptcy, that lender ranked behind us. For our risk, it played exactly the role of a capital injection: a cushion that absorbs losses before the bank suffers any.

Hence the term quasi-equity. It does not appear on a balance sheet filed with the Moniteur belge (the Belgian official gazette). It is an analyst's reading, and that reading is what counts when you ask for a loan.

The effect is mechanical. More restated equity means a more comfortable debt ratio in the banker's eyes, so more lending is possible alongside. Sambrinvest sums it up as a "financial leverage effect" with bankers, on its financing solutions page. Invest.BW, on its partnership page, says it never finances the whole of a need on its own.

One warning I learned the hard way: not all subordination clauses are equal. A subordination limited in time, or one that does not name the bank, may not be restated. Have the wording approved by your bank before signing, not after.

The argument: for a profitable SME, it is the cheapest instrument in terms of shares

Take a €1M project the bank will not finance on its own. Two ways to fill the gap: an equity injection or a subordinated loan.

With equity, the stake you give up is: investment divided by (pre-money valuation + investment). With €1M at a €4M pre-money, you give up 20%. At €9M, 10%. And you do not get that stake back: the investor is paid out of the capital gain when it sells, in other words out of your work over the years that follow.

With a subordinated loan, you give up 0%. You pay interest, and you repay the million. But after maturity, the company is entirely yours, with all the value created in between.

What funders publish, checked on their websites on 15.10.2026:

Three figures to anchor on. Three Walloon lenders publish the same €2.5M ceiling. Namur Invest goes down to €100,000, making it the only one explicitly targeting small amounts. And Namur Invest publishes a portfolio split of roughly 80% debt and 20% equity: for it, lending is the rule and taking stakes the exception.

The objection: it is expensive and it comes back at maturity

I heard the serious objection from a finance director: "A subordinated loan is a more expensive loan that you still have to repay. Where's the gift?"

He is right on both counts.

Cost first. The subordinated lender takes more risk than the bank, so it asks for more. Most of the players I checked do not publish their rates, and I am not going to invent them. But the order is known: more expensive than a bank loan, cheaper than what a shareholder will expect from its stake in an SME that succeeds.

Maturity next. A €1M bullet loan over seven years means €1M to pay out in year seven. I saw a file, on the bank side, where nobody had planned for that repayment. The company was doing well. It had to refinance in a hurry, on worse terms. A negative fact, but a real one: a subordinated loan postpones a burden, it does not remove it.

And there is one case where it is plainly a bad idea: plugging recurring losses. If the business loses money every year, a subordinated loan only pushes the problem back, with interest on top. No serious lender will offer one for that anyway.

The nuance: a variable return changes the maths

Some lenders link part of the return to the company's performance. The best-documented case is ORSA's Smart Bond, as published:

• subordinated loan of €500,000 to €2.5M, over 5 to 10 years, with no dilution;
• a minimum annual interest, paid every year;
• a variable component based on performance indicators, typically EBITDA, paid at maturity with the principal;
• at maturity: repayment, rescheduling if the situation warrants it, or conversion into equity by mutual agreement;
• reserved for Walloon SMEs with positive EBITDA and recurring cash flows.

This structure partly answers the objection. If the company goes through a bad patch, the variable part shrinks, and the burden with it. If it performs, the lender earns more, which is the price of financing that takes no stake. The option to reschedule at maturity answers the risk of one-off repayment. The minimum rate is not published on the pages I read.

To compare this kind of loan with a conventional bank loan, do not look at the minimum rate alone. Have the total cost simulated under a cautious scenario and an ambitious one. In the second, the loan costs more. It is also the scenario in which you can afford it.

Who offers them in Belgium?

In Wallonia, the offer is dense. The provincial invests (Walloon regional investment companies), Namur Invest, Invest.BW, Sambrinvest, publish subordinated or convertible loans, on the terms in the table above. Noshaq in Liège and IMBC in Mons do not detail a subordinated product on the pages consulted. On the private side, ORSA publishes the Smart Bond. Wallonie Entreprendre, the Region's public financing arm, funds those invests (€1bn invested in the invests, according to its published figures) and itself lends, guarantees and takes equity.

In Brussels, finance&invest.brussels (the Brussels-Capital Region's public financing arm) publishes loans, guarantees and equity stakes, up to €5M for SMEs as co-investment, without naming a subordinated product on the page I read. In Flanders, the public counterpart is PMV. I have not checked its terms, so I do not quote them.

To see all nine players side by side, with ticket, instrument and area, the ranking of investment funds for SMEs covers this check. And to place the subordinated loan among the other instruments, equity, debt and quasi-equity walks through the full ladder.

Three checks before signing

I will end with what I would have any owner-manager do before signing:

1. Have the subordination clause approved by the bank, to be sure it restates it as quasi-equity.
2. If the return is variable, have the total cost simulated under the cautious and the ambitious scenario.
3. Plan from day one how the principal will be repaid at maturity: cash, refinancing, conversion.

If the subordinated loan is not enough, the comparison with an equity injection is set out in bank debt or equity. For the clause itself, a company lawyer will cost you less than a badly drafted subordination.