Senior Debt: What It Is and Why It’s Less Risky

When companies borrow money, not all debt is created equal. Some lenders are paid back before others—especially if the company goes under. That’s where senior debt comes in.

What Is Senior Debt?

Senior debt is the top priority when it comes to repayment. If a company goes bankrupt, senior debt holders—typically banks or bondholders—are first in line to get their money back. After they are paid, then junior (or subordinated) debt holders, hybrid instruments like convertible notes, and finally, shareholders. Common stockholders are at the very bottom of the repayment chain.

How Senior Debt Works

Senior debt is often backed by collateral—like company equipment, real estate, or vehicles. This security makes it less risky for lenders. In exchange for this lower risk, lenders typically receive a lower interest rate. This is why banks, with their stable, low-cost funding sources (like your checking and savings accounts), are usually the ones issuing senior debt. FinanceBoston, Inc. is a great resource for senior debt finance especially when considering acquisition financing. 

These loans are issued for a fixed time with scheduled payments for interest and principal. Because senior debt holders have more to lose if things go south, they often have a say in how much junior debt a company can take on. If a company borrows too much overall, it risks not being able to pay anyone back—so senior lenders want to keep the debt load manageable.

There are two main types of senior debt:

• Secured senior debt is backed by specific assets. If the company defaults, the lender can seize and sell the collateral.
• Unsecured senior debt isn’t tied to a specific asset but still takes priority over other unsecured debts if the company goes bankrupt.

Senior Debt vs. Subordinated Debt

The key difference between senior and subordinated (junior) debt lies in who gets paid first during bankruptcy. Senior debt holders get first dibs. Only once they’re paid in full do subordinated lenders get anything—if there’s anything left.

This repayment order makes subordinated debt riskier, which is why it often comes with a higher interest rate. But with greater reward comes greater risk—junior lenders can lose some or all of their investment in a collapse.

Why Senior Debt Matters

Whether you’re an investor, lender, or business owner, understanding senior debt is crucial. It represents a safer form of lending, with stronger protections and earlier repayment rights. And in a financial storm, being first in line makes all the difference.

Ready to Put Your Capital to Work Smarter? At FinancBoston, Inc., we specialize in strategic financing solutions that prioritize security, performance, and long-term growth. Whether you’re looking to invest, raise capital, or restructure debt—our team delivers results with integrity and insight. Call us today or visit FinancBoston.com to schedule a consultation.

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