Using the assets and cash flow of the underlying business as collateral, a business typically uses senior debt to cover a substantial portion of the funding needed to operate.
Senior loans are exposed to the least risk of debt because they command a senior position with respect to scheduled interest, principal payments and collateral. However, unlike senior subordinated and junior subordinated loans, these senior loans typically do not entitle the lender to obtain any stock or warrants to purchase stock of the borrowers. As such, senior loans generally do not participate in the equity appreciation of the value of the business.