What does subordinating a vendor take-back to bank financing mean for me?

As the seller, you may be asked to sign a subordination so the buyer’s bank can lend. It does not cancel your note. It changes where you stand if the buyer’s assets are sold to pay debts. The rules here are Ontario’s, and other provinces have their own.

What the Act says

Section 38 of Ontario’s Personal Property Security Act says a secured party may subordinate its security interest to any other security interest in the security agreement or otherwise, and that the subordination is effective according to its terms. Because the document controls, you give up only what it says you give up. Section 50 also allows a financing change statement to be registered where a security interest perfected by registration has been subordinated.

Terms to read before you sign

• Which of your collateral the subordination covers, and whether it covers all of it or only some assets.
• Whether it is limited to the bank’s loan as it stands today or covers larger or renewed borrowing later.
• Whether it blocks payments on your note, and in what circumstances.
• What you may do if the buyer defaults on your note, and whether the bank must be told first.
• Whether it ends when the bank is repaid.

What stays the same

Your note and the buyer’s promise to pay it continue. Any guarantee from the buyer’s owners is a separate matter, so confirm the subordination does not release it. BDC describes a financing structure that may combine the buyer’s investment, a business loan and seller financing, and says it assesses the complete structure. Ask your lawyer to compare the terms with your price, and see how a seller can secure the note. Ontario’s registry service lets you register a security interest or search for a lien.