Senior debt

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    Page written by Chris Godfrey. Last reviewed on March 14, 2025. Next review due October 1, 2026.

    Senior debt may be the most cost-efficient way to finance your business. Giving lenders repayment priority and providing collateral can lower the interest rate you’ll pay across a range of business loans.

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      What is senior debt?

      Senior debt is a type of loan or financial obligation that has the highest priority in repayment if a company defaults or goes bankrupt. It is typically secured by collateral and carries lower interest rates compared to subordinated debt due to its lower risk. Senior debt holders are paid before other creditors, including subordinated debt and equity investors. 

      Banks, institutional lenders, and online lenders commonly provide senior debt for business financing, acquisitions, or expansion. This debt often includes covenants (rules) that require the borrower to meet certain financial conditions. While senior debt instruments provide security for lenders, they can limit a company’s financial flexibility due to strict repayment terms and collateral requirements.

      If a business goes bankrupt, who gets paid?

      When a company goes into liquidation there is a strict ranking of how creditors get repaid:

      1. Senior debt holders – usually banks and bondholders
      2. Subordinated debt holders – often private lenders, investors, bondholders
      3. Convertible note holders – also usually private lenders, investors and bondholders
      4. Preferred stock holders – shareholders with superior rights
      5. Common stock holders – shareholders with no superior rights

      Senior debt at a glance:

      • Senior debt is debt and obligations which are first in line for repayment in the case of bankruptcy.
      • Because senior debt has the highest priority it usually carries lowest risk and offers lower interest rates.
      • Senior debt is most often secured by collateral, which can also make it less risky.
      • Subordinated debt gets paid back after senior debt, which is why it carries higher interest rates.

      Typical interest rates on senior debt

      Interest rates on senior debt vary according to the type of transaction being funded and the risk profile of the borrower. However, this type of borrowing usually comes with lower interest rates than many other forms of commercial finance. Current rates for senior debt start at 8%.

      Who uses senior debt and why?

      Senior debt is used by businesses, financial institutions, and private equity firms to finance operations, acquisitions, or expansions while minimizing borrowing costs. 

      • Corporations use senior debt for working capital, equipment purchases, or refinancing existing debt due to its lower interest rates. 
      • Private equity firms leverage senior debt in leveraged buyouts (LBOs) to acquire companies while preserving equity capital. 
      • Financial institutions extend senior debt to businesses as a secure lending option with priority repayment. 

      Companies favor senior debt because it provides essential funding with reduced risk for lenders, ensuring access to capital without excessive interest rates or loss of ownership.

      What are the types of senior debt?

      There are different types of senior debt. In most cases, collateral is required.

      Term Loans

      Term loans are the most popular type of commercial loan. Offered by traditional banks, credit unions and online lenders, these loans are typically used for one-off investments where borrowers know exactly how much cash they need. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Borrow up to $5 million. 

      • Best for: Expansion, acquisitions, refinancing

      Business Line of Credit

      Also known as a revolving line of credit, this is a business loan that functions like a high-value credit card but comes with lower interest rates and fees. Borrowers can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing. 

      • Best for: Managing cash flow, working capital

      Asset-based lending

      Asset-based lending allows businesses to borrow against their hard assets such as plant, machinery, vehicles, real estate, materials and inventory. Once the loan is repaid, the lender’s lien is dissolved and full title to the asset reverts to you.

      • Best for: Asset purchases

      Bridge loans

      A bridge loan, also known as interim financing or a swing loan, is a short-term loan used to provide temporary financial assistance until a more permanent source of funding becomes available. 

      • Best for: Real estate purchase or construction

      Pros and cons of senior debt

      For borrowers, senior debt has advantages and disadvantages:

      Pros:

      • Lower interest rates – Due to its lower risk, senior debt has more favorable rates than many other types of commercial finance.
      • Flexible loan structures – Includes options such as term loans, revolving credit, and asset-based loans.
      • Predictable repayment terms – Fixed schedules help businesses manage financial planning.

      Cons:

      • Strict covenants – Borrowers must meet financial conditions, limiting flexibility.
      • Collateral requirement – Businesses may need to pledge assets, increasing risk.
      • Potential for default – Missing payments can lead to asset seizure or financial penalties.
      • Limits additional borrowing – Companies may be restricted from taking on more debt until senior debt is repaid.

      Senior debt vs. subordinated debt

      • Senior debt has the highest repayment priority and is often secured by collateral. It carries lower interest rates because it presents less risk to lenders. Banks, institutional investors and online lenders typically issue senior debt, which includes term loans, revolving credit, and asset-based loans.
      • Subordinated debt ranks below senior debt in repayment order. It may be unsecured or have fewer claims on assets, making it riskier for lenders. To compensate, this kind of financing carries higher interest rates. Private investors and bondholders often provide subordinated debt, which companies use when they need additional capital beyond their senior debt limits.

      How to repay senior debt

      Borrowers repay senior debt via scheduled payments, which typically include both principal and interest. Repayment structures vary but often follow a fixed schedule (such as monthly or quarterly payments). Some loans, like term loans, require equal installments, while revolving credit facilities allow flexible repayments based on usage. 

      How Swoop can help

      The interest rate, fees, and terms and conditions of senior debt can vary significantly. Shopping around before settling on a deal is essential. You can do this by approaching banks, credit unions and online lenders one by one over days, weeks, or even months – or you can contact Swoop to compare high-quality business loans from a choice of lenders. Get the funds you need at the lowest rate. Register with Swoop today.

      Written by

      Chris Godfrey

      Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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