What Is a Senior Bank Loan?

Jim B.

A senior bank loan is a loan issued by a bank to an individual or, more often, a business in return for interest payments and eventual repayment of the loans. What distinguishes this loan is that the bank that lends the money is entitled to payback before all other lenders involved with the borrower. This characteristic is important should the borrower default on payback obligations and, due to financial calamity, file for bankruptcy. An individual can buy a senior bank loan on the secondary market, thereby taking over the rights that accompany the senior debt.

A senior bank loan is issued in return for interest payments.
A senior bank loan is issued in return for interest payments.

Many businesses use loans for various initiatives. Some young businesses use loans for start-up costs like finding office space or funding marketing efforts. Other businesses that are a bit more established might use the loans for a business initiative like expansion to a new market or development of a new product line. Whatever the case, banks are often the source for these loans since they have access to significant capital. As recompense for the risk of giving the loan, banks often demand some sort of security from the borrower, and one way this is accomplished is through a senior bank loan.

Senior bank loans are most often issued to businesses.
Senior bank loans are most often issued to businesses.

The basic components of a senior bank loan are similar to other loans. A bank will lend the money to the borrowing company, which then promises to make regularly scheduled interest payments at a predetermined rate and to pay back the principal at the end of the loan's term. With a senior loan, however, the lending bank gets precedence should the business lose its ability to repay.

Often, a company that can't pay back a senior bank loan is in financial trouble. If that company files for bankruptcy, the bank that made the senior loan gets first claim on any assets that the company liquidates. Any other lenders that were involved with the company must wait for the senior loan to be repaid before they can make any claims on remaining assets.

Individual investors may become involved with a senior bank loan through the secondary market. Banks resell these loans to investors, often in packages. When this occurs, all rights that belonged to the bank as the senior lender are transferred to the investor that buys the debt. This makes the debt a relatively safe investment. Those investors that have purchased the loan will be first in line if the borrower falls into bankruptcy, thus allowing them a measure of protection from unexpected defaults.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?