Many people are looking for a lucrative savings product that also promises a profitable return. In the case of a certain share capital, a subordinated loan may be considered. But even for those who have a limited share capital available, there is a special variant of the subordinated loan, which we will deal with here in particular. But what opportunities arise with this financial instrument? And what risks are involved?
What is a subordinated loan?
A subordinated loan is a financial instrument of the economy. In doing so, a company buys a loan that, in the event of insolvency , falls short of other claims in the ranking. It is therefore only required if all other creditors were paid. As a rule, the investment is not secured. For this, the term is much shorter (about 1 year), and the interest rate significantly higher. The lenders do not acquire the status of a partner with the award, but can be involved as a silent partner in sales.
- The borrower has the option of silent participation, and is therefore involved in the profit
- very lucrative “saving form” due to the high interest surcharge
- Subordination Agreement
- no investor protection
Lenders can be:
- development banks
- Private investors
The subordination agreement
With the subordination agreement, the lender agrees that his claim falls behind the claims of all other creditors (eg banks, suppliers). That is, in the worst case, the creditor carries the risk of not getting his investment back.
No investor protection for the creditor
In Austria, the Financial Market Authority looks after the protection of small and medium-sized investors. This usually protects the investor against fraud . As a lender to a subordinated loan, however, this investor protection does not exist because it is a non-bank investment.
The most important points for lenders
- set a non-performance-related interest
- Pay attention to relatively short terms
- You agree terms of notice , but with no more than six months’ notice
- ask for insight into the company’s financial statements for decision-making
- For startups to make decisions, ask for a business plan
- do not use more than 5% to max. 10% of your investment capital for subordinated loans
Crowdfunding: Another form of subordinated loan
Crowdinvesting is nothing more than a modification of the known subordinated loan. The only difference is that many investors act as lenders at the same time. This in turn offers small investors the opportunity to act as lenders. The investment can be very promising, depending on the company. But as everywhere applies here: where great opportunities, as well as high risks.
Taxation of the subordinated loan
The borrower has to tax the subordinated loan as debt capital . The lender does not have to pay tax on the investment because it is private capital . However, once income returns, they must be taxed as such.