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Subordinated Debt in 2025: A Strategic Tool for Credit-Constrained Environments

Date: Jun 03, 2025 @ 07:00 AM
Filed Under: Industry Insights

In today’s lending climate, credit capacity is tighter, competition is sharper, and borrower expectations haven’t softened. Growth-minded companies require speed, full funding, and flexible terms to navigate the current economic climate, regardless of the macroeconomic headwinds.

As competition intensifies and traditional facilities reach their limits, non-bank subordinated debt is emerging as a powerful tool for safeguarding relationships, preserving deals, and differentiating in a crowded market. It’s a flexible, cashflow-tied capital layer, sourced from the non-bank community, that helps lenders stay in the deal, even when their internal credit policy may limit their commitment capabilities.

The Current Credit Environment: Where Sub Debt Fits In

The past 12 months have ushered in a new set of challenges for the ABL and factoring community:

  • Borrowers are pushing for higher advance rates, and there is increasing pressure to offer overadvances to win deals
  • Deal teams are seeing strong opportunities stall due to conservative internal thresholds
  • High-performing borrowers are being won over by lenders who can offer faster, more flexible capital

Lenders face a difficult choice: either stretch internal risk frameworks to retain clients or lose ground in an increasingly competitive market. Some non-bank lenders are offering a third path, an off-balance sheet tool to meet borrower needs without introducing additional risk.

As strategic transactions grow more complex and time-sensitive, some non-bank lenders are stepping in to fill critical gaps with non-dilutive sub debt. This often means they enter a deal earlier, with repayment structured around cash flow instead of rigid terms, and fewer borrower-centric constraints than mezzanine financing.

In practice, that can mean covering a leverage shortfall in a sponsor-backed acquisition, where senior lenders are already capped out on advance rates. Or it may be used in a refinancing scenario where the borrower can’t bring additional collateral, and traditional lenders can’t stretch further. In both cases, the injection of non-bank subordinated debt preserves the structure and relationship while keeping relevant timelines on track. It also supports situations where collateral coverage is too thin for a full ABL facility, but cash flow remains strong.

For ABLs and factors, non-bank sub debt offers a fast, borrower-centric option that balances speed, structure, and client outcomes, without requiring compromises on credit quality. Instead of stretching internal policies or weakening collateral positions, ABLs and factors can source non-bank sub debt to absorb the additional risk, allowing them to stay disciplined without walking away from the deal.

It’s also worth noting that an often-overlooked advantage of sub debt is its longer-term impact: it can be a catalyst for client growth. By unlocking incremental capital at a critical moment, sub debt allows borrowers to pursue expansion plans, make strategic investments, or enter new markets—ultimately increasing their borrowing capacity and deepening their relationship with their primary lender over time.

Considerations for Partnering with Subordinated Debt Providers

The most effective time to introduce this new form of subordinated debt is early in the structuring process. Ideally, when advance rate limits are maximized, equity appears light, or internal thresholds are already being tested. Raising the concept early allows you to stay in control of the structure, rather than scrambling to patch capital gaps late in the process.
To make that approach work, lender selection matters. ABLs and factors should look for a non-bank lender who understands the demands of senior-led deals and contributes without slowing timelines or adding complexity.

That collaboration also extends to intercreditor agreements. While these negotiations can sometimes be viewed as a point of friction, experienced sub-debt providers, including many private credit lenders, are well-versed in working within established intercreditor frameworks. Most are more than willing to engage in constructive negotiations, offering clarity around repayment priority, enforcement protocols, and default coordination to benefit everyone involved.

Conclusion

Non-bank lenders have molded subordinated debt into a reliable tool for dealmakers seeking to help clients succeed without compromising risk tolerance. In a market defined by constraint and competition, non-bank sub debt offers lenders a way to stay engaged, remain selective, and move with confidence.

When introduced at the right moment and provided by the right partner, it strengthens your position, supports client outcomes, and reinforces the integrity of the capital stack.

Joseph Camberato
Chief Executive Officer | National Business Capital
Joe Camberato is the CEO and founder of National Business Capital – the leading FinTech marketplace, helping entrepreneurs access competitive financing fast through an easy-to-use online platform and an experienced team. From SBA loans to term loans, lines of credit, sub debt, equipment loans, revenue-based financing, and more, Joe and his team have helped clients secure over $2 billion in funding since 2007.
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