Senior Debt

Pricing and Fees

Most senior loans carry a floating rate set as a margin over a benchmark, typically SOFR or the prime rate. The margin depends on leverage, industry, size and lender type, with banks generally pricing below private funds. Some term loans can be fixed, or swapped to a fixed rate with an interest rate hedge.

Beyond interest, expect an upfront or closing fee, an unused fee on any undrawn revolver commitment, agency fees in multi-lender deals, and possibly prepayment premiums. Compare offers on all-in cost over the expected life of the loan, not just the margin.

Covenants and Lender Protections

In exchange for low pricing, senior lenders ask for tight controls. Typical terms include:

• Financial covenants. A maximum leverage ratio and a minimum fixed charge or debt service coverage ratio, tested quarterly.

• Negative covenants. Limits on additional debt, liens, dividends, acquisitions and asset sales.

• Reporting. Monthly or quarterly financials, an annual budget and compliance certificates.

• Cash sweeps. Required prepayments from asset sale proceeds or a share of excess cash flow.

What Happens in a Default

If a borrower breaks a covenant or misses a payment, the senior lender typically has the right to charge default interest, stop further advances, demand repayment and, ultimately, enforce its lien on the collateral. In practice, most lenders first negotiate a waiver, amendment or forbearance agreement, often for a fee and tighter terms.

In a bankruptcy, secured creditors are generally paid from the value of their collateral before unsecured creditors and equity holders, subject to the rules of the Bankruptcy Code and any intercreditor agreement. This is a general overview, not legal advice. Companies facing default should speak with qualified counsel.

Frequently Asked Questions

Is senior debt always secured?
No. Seniority describes payment priority, and security describes collateral. Most private company senior loans are secured, but large public companies often issue senior unsecured bonds.

Why is it cheaper than other debt?
The senior lender is first to be repaid and usually holds collateral, so its expected loss is lower. Junior lenders charge more to make up for standing further back.

Can a company have more than one senior lender?
Yes. Larger loans are often shared by a group of lenders under one credit agreement, with one acting as agent. Companies can also split senior claims by collateral, for example an asset-based revolver alongside a term loan.

Build Your Financing on a Solid Base

A well-sized senior loan gives a business low-cost capital and room to grow, while a poorly structured one can limit its choices for years. Review your cash flow, collateral and plans, then explore the senior debt options that fit your company today.

Senior debt is borrowing that has first claim on a company's cash flow and assets, ahead of junior lenders and shareholders. Because the lender stands at the front of the line, it is usually the cheapest money in a company's capital structure and the foundation that every other layer of financing is built around.

For most private companies, the senior lender is a bank or a private credit fund, and the loan is secured by a lien on business assets. Understanding how that loan is sized, priced and protected helps owners negotiate better terms and avoid surprises later.

Where It Sits in the Capital Structure

Think of a company's funding as a stack, paid from the top down if the business is sold or wound up:

1. Senior secured loans. First claim on pledged collateral and first in line for payment.

2. Senior unsecured debt. Ranks equally with other general creditors and ahead of anything that is contractually subordinated.

3. Subordinated or mezzanine debt. Paid only after senior lenders, under the terms of a subordination or intercreditor agreement.

4. Preferred and common equity. Owners receive what is left after all lenders are paid.

The lower the risk of a layer, the lower its price. That is why most borrowers want as much of their funding as possible in senior debt, and why the senior lender sets limits on everything below it.

Secured and Unsecured Senior Loans

Most private middle market companies borrow on a secured basis. The lender takes a security interest in receivables, inventory, equipment and often intellectual property and the stock of subsidiaries, then perfects that interest by filing a UCC-1 financing statement under Article 9 of the Uniform Commercial Code. A first-lien position means no other lender has a prior claim on that collateral.

Senior unsecured debt is more common for large, highly rated companies that issue bonds or borrow from bank groups on the strength of their credit alone. It ranks ahead of subordinated debt but has no specific collateral backing it.

Common Forms of Senior Financing

• Revolving credit facility. A line the company draws and repays as needed, usually for working capital.

• Term loan. A fixed amount repaid on a set schedule, often with a larger payment at maturity.

• Delayed draw term loan. Committed funds the company can draw later, often for acquisitions.

• Asset-based revolver. A line sized on a borrowing base of eligible receivables and inventory.

How Lenders Size the Loan

Senior lenders usually set the loan amount with two tests: leverage and coverage.

Take a hypothetical company with $6 million of EBITDA. If the lender is comfortable with senior leverage of 3.0 times EBITDA, the maximum loan is $18 million. The lender then checks coverage. If the company has $4.5 million of cash available for debt service and the proposed loan needs $3 million a year in interest and principal, coverage is 1.5 times. If that cushion looks too thin, the lender reduces the amount or lengthens the repayment schedule.

Asset-based lenders work differently, setting availability as a percentage of eligible collateral rather than a multiple of earnings.