Picture this: you've got a killer restaurant concept but your savings account isn't quite there yet. A subordinated loan might be your bridge to funding - it's money borrowed from family, friends, or investors that gets repaid only after banks get theirs. Here's how this financing tool can make or break your restaurant dreams.
What exactly is a subordinated loan?
Think of a subordinated loan as standing in line behind the bank. You borrow money from someone (typically family or close friends), but they only get paid back after all senior debts are cleared. Banks love this arrangement because it reduces their risk profile.
? Example:
You're launching a restaurant and need €150,000:
- Personal savings: €30,000
- Bank loan: €90,000
- Subordinated loan (parents): €30,000
The bank treats you as having €60,000 in personal funds (30k savings + 30k subordinated).
Why banks value subordinated loans
Banks typically want 20-30% equity in any deal. But the reality - they don't care if that equity comes from your piggy bank or Uncle Joe's wallet. A subordinated loan helps you hit their equity requirements without draining your life savings.
- Your equity position looks stronger on paper
- Banks perceive lower risk since you've got skin in the game
- You can qualify for larger loan amounts
- Better interest rates often follow reduced risk profiles
Timing your subordinated loan strategy
This financing approach shines for aspiring restaurateurs with solid business plans but limited personal capital. And honestly, that describes most restaurant starters I've encountered.
? Example situation:
Sarah's planning a bistro requiring €120,000:
- Personal savings: €15,000 (12.5%)
- Bank demands 25% minimum equity
- Parents provide €15,000 subordinated loan
- Total 'equity': €30,000 (25%)
Bank approves the remaining €90,000 loan.
Setting up your subordinated loan properly
Documentation matters - even with family money. You'll need ironclad contracts covering interest rates, repayment schedules, and disaster scenarios. Don't let family dynamics cloud your business judgment here.
⚠️ Important:
Your contract must explicitly state repayment occurs only after senior debt satisfaction. Without this clause, banks won't count it as equity.
Essential contract elements
A properly drafted contract prevents future headaches. Get a lawyer involved or grab a template from your local Chamber of Commerce - it's worth the investment.
- Principal amount: Total borrowed sum
- Interest rate: Often zero with family, but can vary
- Maturity date: Repayment timeline (typically 5-10 years)
- Subordination clause: Payment priority after senior debt
- Prepayment terms: Early repayment conditions and penalties
One of the most common blind spots in kitchen management is underestimating how these financial arrangements affect daily cash flow. Your monthly obligations don't disappear just because family's involved.
Alternative equity-building strategies
Family and friends tapped out? You've got other paths to boost your equity position and satisfy bank requirements.
? Other options:
- Crowdfunding platforms (small investments from many people)
- Angel investors (experienced restaurateurs seeking opportunities)
- Government startup grants (municipal or provincial programs)
- Microfinance institutions (specialized small business lenders)
Understanding the risks involved
Here's reality: subordinated loans don't eliminate financial pressure - they just shift the timeline. You still need sufficient revenue to service all debt obligations, regardless of payment priority.
⚠️ Important:
Restaurant bankruptcy typically means subordinated lenders lose everything. This reality can severely damage personal relationships if not discussed upfront.
How do you arrange a subordinated loan? (step by step)
Calculate how much you need
Make an overview of your total investment and how much personal money you have. Calculate the difference between what you have and what the bank wants to see as equity (usually 25-30%).
Find a suitable lender
These are often family, friends or acquaintances who believe in your plans. Explain honestly what the risks are — the money can be lost if the restaurant doesn't succeed.
Have a contract drawn up
Make sure you have a legally correct contract with a subordination clause. This must make clear that repayment only happens after all other debts. Have a lawyer review it.
Discuss with your bank
Talk to your bank advisor about the subordinated loan before you sign the contract. They need to confirm that they'll accept it as equity for your loan.
✨ Pro tip
Secure your subordinated loan documentation at least 90 days before applying for bank financing. Banks require complete contract review before approving primary loans, and rushed paperwork often contains costly mistakes.
Calculate this yourself?
In the KitchenNmbrs app you can do this in just a few clicks. 7 days free, no credit card.
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Frequently asked questions
Do I have to pay interest on a subordinated loan?
What happens if my restaurant goes bankrupt?
Can I repay a subordinated loan early?
Does a subordinated loan always count as equity?
Sources consulted
- EU Verordening 852/2004 — Levensmiddelenhygiëne (2004) — Official source
- EU Verordening 853/2004 — Hygiënevoorschriften voor levensmiddelen van dierlijke oorsprong (2004) — Official source
- EU Verordening 1169/2011 — Voedselinformatie aan consumenten (2011) — Official source
- NVWA — Hygiënecode voor de horeca (2024) — Official source
- NVWA — Allergenen in voedsel (2024) — Official source
- Codex Alimentarius — International Food Standards (2024) — Official source
- FSA — Safer food, better business (HACCP) (2024) — Official source
- BVL — Lebensmittelhygiene (HACCP) (2024) — Official source
Food Standards Agency (FSA) — https://www.food.gov.uk
The HACCP standards shown in this application are for informational purposes only. KitchenNmbrs does not guarantee that displayed values are current or complete. Always consult the FSA or your local authority for the latest regulations.
Written by
Jeffrey Smit
Founder & CEO of KitchenNmbrs
Jeffrey Smit built KitchenNmbrs from 8 years of hands-on experience as kitchen manager at 1NUL8 Group in Rotterdam. His mission: give every restaurant owner control over food cost.
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