A subordinated loan is a rather simple catalytic instrument that can help to channel capitals towards impact enterprises. It can be incorporated into a capital structure or a hybrid of debt and equity 33 that ranks below senior debt but above common shares in the liquidity order of priority. The liquidity order determines who gets paid first in case of bankruptcy, and it follows a waterfall payment system, where senior lenders are the first to receive payments followed by the subordinated lenders if and only if the senior creditors have been fully paid back.

A subordinated loan together with the equity of an enterprise serves the role of the so called catalytic first-loss capital. The catalytic first-loss capital is a bundle of instruments that enables to improve the risk profile of an impact enterprise, thus mobilising greater amounts of capital towards addressing social challenges, and encouraging the flow of additional funding, in particular in the form of Senior Unsecured Loan and Senior Secured Loan.