Senior Debt — Business Finance Glossary

Defining senior debt

Senior debt is any borrowing that takes priority over all other obligations in a company's capital structure in the event of insolvency or enforcement. The lender holds a first-ranking security interest — typically a fixed and floating charge over the borrower's assets — and will be paid in full before subordinated creditors, mezzanine lenders, or equity holders receive anything.

Because the risk to the lender is lower than for junior forms of debt, senior debt carries the lowest cost of borrowing in a leveraged structure. UK company directors will encounter it as term loans, revolving credit facilities, or asset-based lending lines.

Security and covenant requirements

Senior lenders protect their position through two mechanisms: security and covenants. Security gives the right to take and sell assets on default. Covenants — financial and operational undertakings in the loan agreement — constrain how the business is run and require it to maintain certain financial ratios (leverage, interest cover, cash flow cover) measured at regular test dates.

A breach of financial covenant does not automatically trigger repayment but gives the lender the right to accelerate the debt. Directors should understand which covenants apply and how headroom is calculated before agreeing terms.

How senior debt interacts with other layers

Where a business has both senior debt and subordinated or mezzanine debt, the two lender groups will execute an intercreditor agreement. This document sets out the payment waterfall, enforcement standstill provisions, and conditions under which the junior creditor may or may not take action independently.

• Senior lender's consent is usually needed before additional debt is raised
• Permitted payment baskets define when junior interest can be paid
• Cross-default clauses may link the senior facility to other agreements

Senior debt in practice for UK limited companies

For most UK limited companies, senior debt is the primary source of external finance — a revolving credit facility for working capital, a term loan for capital expenditure, or an asset-based lending facility secured against receivables and stock. The key commercial terms to negotiate are the margin, arrangement fee, non-utilisation fee, tenor, and the precise wording of financial covenants. Confirm documentation terms with your legal adviser before execution.