When you need to raise funds for a project or company either to pursue expansion or other goals, you have different ways to do that. If you are a public limited company, you can increase the number of stocks floating in the stock exchange to raise the funds. They may also opt for mezzanine and subordinated debts, but they may also go for senior debt.
What Is Senior Debt and Its Use?
Senior debt is just like any other kind of debt in that you can use it to finance your development or expansion goals. It can be used by companies for a particular project that they have, or it may be used for development of facilities and expanding operations overseas by a company.
The thing is that this is the kind of debt is that it is top most in the list of priorities of businesses and that’s why lenders prefer it, although the monthly repayment and interest is lower in comparison to other kinds of debt and equity financing.
Can you Take on Senior Debt?
If you have a construction project that you need to complete and need funds for it, you can opt for senior debt financing. But even then, you need to be careful and practice your due diligence in order to get that kind of funding from senior debt. www.stamfordcapital.com.au can help you with your funding needs and help you acquire debt for your property.
The funding can be done by banks and nonbank institutions as well as private investors.
Senior Debt Example
Let’s say that a lender gives you $10 million in secured senior debt. The interest and monthly payments that the lender gets from you are minimum, and the lender realizes it because this is the safest kind of investment there is.
The reason it is considered safest is because the secured senior debt holders will be first in line to get paid if you default or are unable to run your business effectively. The ranked spectrum of repayment typically goes from senior down to junior debt to subordinated and mezzanine debt and then stockholders.
Anyone who is taking on the risk of later payment gets considerable higher immediate return in the form of higher interest and principal payments.
The lenders may be other businesses and, most commonly, banks. Regardless of the kind of business you have, you are free to apply for senior debt but it has a set of stringent criteria that you must follow in order to acquire the debt. But there are two main ways that you can go about financing your business needs: equity and debt.
Investors Need Returns
Provided that your project is lucrative for the investors you can get secured senior debt financing from them. This means that if a project is worth a total of $90 million, if you ask them for $75 million in senior debt, they won’t go for it because it shows them that it is a risk to take on the brunt of your financing costs and since the payoff is less, they wouldn’t opt for it.
If, instead, it was a $10 million senior debt for a $90 million project they would likely take on the debt.