TL;DR: Senior debt is debt that ranks first for repayment if a company is wound down or defaults, ahead of subordinated debt and equity. Because it carries the lowest repayment risk, senior debt typically has the lowest cost of capital among a company's financing sources.
Senior debt sits at the top of the repayment hierarchy, or capital stack. If a company faces liquidation or default, senior lenders are repaid before subordinated (junior) lenders and before equity holders. This priority position makes senior debt the least risky form of financing for the lender, which is why it usually carries lower interest rates than junior debt or equity.
Senior debt is often secured against company assets, which strengthens the lender's claim. The seniority is typically set out in the loan agreement and, where multiple lenders are involved, in an intercreditor agreement that defines who gets paid in what order.
A company's financing can be layered. Senior debt is the most protected layer, subordinated debt sits beneath it, and equity sits at the bottom, last to be repaid but with the most upside. The order matters most in a downside scenario; in normal operation, all layers are simply serviced according to their terms. Understanding where a facility ranks helps founders see the true cost and risk of each source of capital.
Why is senior debt cheaper than other financing? Because it is repaid first, the lender takes on less risk, and lower risk generally means a lower required return.
Can a company have more than one senior lender? Yes. When it does, an intercreditor agreement sets out how the senior lenders rank relative to one another and how proceeds are shared.
Related terms: Subordinated Debt · Capital Stack · Covenant · Venture Debt
