Definition of Senior Debt
Businesses and individuals can both struggle with multiple types of debt. For larger companies, it is common that the business be involved in many different types of financial transactions and have multiple forms of debt with many different investors. In these situations and others like them, different grades of debt and how the types of debt are treated by the company become very important. Senior debt is the most important type of debt in the eyes of the borrower.
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Definition
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Senior debt is simply the debt that a business holds that is paid off before any other debt. This means that if a business goes bankrupt and must liquidate assets, then senior debt is paid off first, and is often the only to be paid off at all in case of a bankruptcy. On a more day-to-day level, senior debt is usually managed more attentively than other types of debt, and payments tend to be more assured.
Examples
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There are many forms of senior debt, but they tend to be only several different kinds of debt instruments. For instance, funds borrowed from banks in the form of loans are some of the most common types of senior debt, since banks are very large and official lenders, and it is more important to pay them back before smaller lenders (insurance company debt is also senior). Other official types of debt, like bonds and notes that investors hold, are considered senior debt as well.
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Individual Examples
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Individuals rarely have the same senior debt that companies do, because their debt situations tend to be simpler and involve only a few institutions. However, in some cases, individual senior debt can become very important. If a homeowner has a first and second mortgage, the first mortgage is considered senior debt and must be paid off first if the homeowner forfeits the loans.
Risk and Interest
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Because senior debt has a high chance of being paid even if the business goes under, it has relatively low risk, which means many lenders and investors are more willing to lend money for senior debt. This also tends to lower interest rates, making the loan easier for the borrower to secure.
Junior
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Debts that are not paid off first are known as junior debts. Junior debts are often less important, or smaller debts held by the same company that holds senior debt, but sometimes they can be held by separate companies that simply do not have the same claim on the business. These could be supplemental loans, credit card debt or other types of credit from other companies.
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References
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