Defining senior debt: Understanding the benefits and risks

Senior debt is a form of bank financing that provides liquidity to a company to finance its activities, projects and expansions. Senior debt is a form of short-term loan, which must be repaid at the end of a predetermined period. Senior debt is often given by financial institutions, such as banks and private equity firms.

Senior debt is generally ranked second to other forms of debt (e.g. subordinated debt and venture capital), meaning that senior debt creditors are paid first in the event of liquidation. Senior debt is generally more expensive than subordinated debt or venture capital because of the higher interest rates it charges.

Senior debt lenders can be divided into two main categories: those who lend their own money and those who lend money from other investors, such as venture capital funds, debt funds or financial institutions.

The advantages of senior debt include a simple repayment structure and greater certainty than subordinated debt. However, the costs associated with a senior debt loan are generally higher, and the amount of senior debt may be limited.