Definition of Senior Capital
Senior capital denotes the type of capital that is represented in the form of secured loans given to a company. These loans have priority over other financial obligations, which means that in the event of a company’s liquidation, senior capital holders will be repaid before others. This priority status happens because senior capital is backed by a security interest or a claim on certain assets of the company.
Examples
- Bank Loans: When a company takes a loan from a bank and provides collateral such as property or equipment, the bank holds senior capital since it has a secured claim on the company’s assets.
- Bondholder Debt: Corporate bonds that are issued with secured interest in the company’s assets. In liquidation, bondholders are senior debt holders.
- Credit Lines with Collateral: Companies often secure lines of credit by pledging inventory or receivables, which also places these creditors in the senior capital category.
Frequently Asked Questions (FAQs)
What happens to senior capital in case of a company’s liquidation?
During liquidation, senior capital holders are repaid before any other types of financial claims, including unsecured creditors and shareholders. This is because senior capital is typically secured by the company’s assets.
What kind of assets can be used as collateral for senior capital?
Various assets such as real estate, equipment, inventory, and accounts receivable can be used as collateral for securing senior capital.
How does senior capital differ from junior capital?
Senior capital has priority in repayment and is secured by the company’s assets. In contrast, junior capital is a more subordinate form, often non-secured, and repaid after senior capital.
Can senior capital affect company’s leverage?
Yes, since senior capital is typically a form of debt, it impacts the company’s financial leverage by increasing the total debt obligations that need to be serviced.
Are there risks associated with senior capital?
While senior capital is considered more secure than equity or unsecured debt, it still carries risks. If the company’s assets depreciate or are insufficient during liquidation, senior capital holders may not recover the full amount.
Related Terms
- Secured Creditor: A lender who has a legal claim, or lien, on assets of the borrower as collateral for the loan.
- Secured Liability: A debt that is backed by a security interest in specific assets.
- Shareholders’ Equity: The ownership interest of shareholders in the company, representing residual interest after all liabilities are paid.
Online Resources
- Investopedia – Senior Debt
- Corporate Finance Institute – Secured Loans
- Morningstar – Understanding Bondholder Rights
Suggested Books for Further Studies
- “Financial Management: Theory and Practice” by Eugene F. Brigham and Michael C. Ehrhardt
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Handbook of Credit Risk Management” by Sylvain Bouteillé and Diane Coogan-Pushner
Accounting Basics: Senior Capital Fundamentals Quiz
Thank you for diving deep into the concepts of senior capital and enhancing your financial knowledge!
