What is a subordination and postponement of claim, and when does a shareholder have to sign one?

A subordination and postponement of claim is an agreement in which a shareholder who has also lent money to their own corporation agrees to rank their shareholder loan behind the corporation's other debts — typically behind a bank or other outside lender's secured credit facility — and to postpone being repaid until those other debts are satisfied. It's a common requirement in small and mid-sized business financing, where the owner has put money into the business alongside outside financing.

Lenders ask for this because, without it, a shareholder loan could otherwise compete with the outside lender's claim, or the shareholder could be repaid ahead of or alongside the outside lender in a way that reduces what's available if the corporation runs into trouble. A shareholder is typically asked to sign one as a condition of the corporation obtaining or maintaining outside financing, whether at the time a new loan is put in place or later, if the lender becomes aware of an existing shareholder loan. For the shareholder, signing means accepting that their own investment effectively sits behind the bank's claim, which is worth understanding clearly before agreeing.