Finance term
Senior Debt
Also known as: senior loan, first-lien debt, first-priority lien
Definition
Senior debt has first-priority claim to a borrower's assets in bankruptcy or liquidation — it is repaid before subordinated debt and equity holders, making it the lowest-risk (and lowest-cost) layer of a business's capital structure.
Detailed explanation
In a business's capital structure, not all debt is equal. Senior debt sits at the top of the repayment waterfall — senior lenders are paid first from asset liquidation proceeds before any junior claimants receive anything. This priority is established through first-lien UCC filings, first mortgage recordings, or contractual intercreditor agreements.
Because senior lenders bear the least risk of loss in default scenarios, they accept the lowest interest rates. Most SBA 7(a) loans, bank term loans, and commercial real estate mortgages are senior secured — secured by collateral (equipment, real estate, receivables) with a first-priority lien recorded at the state level through UCC filings or county recorders.
For businesses with multiple lenders, the intercreditor agreement defines the seniority waterfall. A typical small business capital stack might include: (1) senior bank term loan with first lien on equipment and real estate; (2) SBA 504 debenture with second lien on the commercial property; (3) subordinated MCA or revenue-based financing with junior position. The senior lender's approval is often required before a junior lien can be placed.
When evaluating loan offers, understanding seniority matters for cost: senior secured financing is reliably cheaper than unsecured or subordinated financing for the same borrower. Reducing the amount of senior-secured debt relative to business value (lower LTV, higher DSCR) typically yields better pricing.
◈ Worked example
- Bank term loan with first lien on equipment — senior debt; equipment sold in bankruptcy, bank paid first
- SBA 7(a) with first mortgage on commercial real estate — senior secured; DSCR and LTV underwritten against this first-priority claim
- Intercreditor agreement: bank holds first lien on receivables; SBA holds second lien — bank is senior, SBA is subordinate
Common questions
The most-asked questions about Senior Debt — answered straightforwardly.
Why is senior debt cheaper than subordinated debt? +
Seniority means first claim in default. Senior lenders recover more in bankruptcy than junior lenders, so they accept lower rates — lower risk warrants lower return. Subordinated lenders demand higher rates to compensate for their junior position in the liquidation waterfall.
Can a business have both senior and subordinated debt? +
Yes — this is a tiered or leveraged capital structure. The senior lender typically must consent to any junior liens through an intercreditor agreement. SBA 504 deals explicitly combine a senior bank loan with a junior SBA debenture (second lien) by design.
What makes a loan 'senior secured' vs. just 'senior'? +
Senior secured debt has both priority (senior in the waterfall) and collateral (specific assets pledged as security). Unsecured senior debt has priority but no collateral claim — it ranks ahead of subordinated debt but behind any secured creditors in a bankruptcy asset sale. For small business lending, nearly all senior debt is also secured.
Further reading
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