Senior debt

BDC describes senior debt as a loan secured by collateral that must be paid off before any other debts when a company goes into default. In an acquisition, BDC says the senior lender provides a loan secured on the assets of the company and has a first charge against assets such as accounts receivable, inventory, real estate and equipment in a recovery situation.

Why the ranking matters

BDC says senior debt is less risky for lenders because of its priority, and that its rates and terms tend to be more favourable than junior debt, which has only a secondary claim on the assets. BDC also notes that a senior lender in an acquisition will usually have the most restrictive repayment terms of the financing participants.

What to ask the lender

• Which assets will the lender take as security, and does it want personal guarantees?
• Must a vendor take-back be ranked behind the loan, and in writing?
• What repayment terms and conditions will apply?

See how to finance a business acquisition in Canada and the ranking below it in subordinated debt.