Advantages and Disadvantages of First Lien Loans
There are different types of loans; one of them being the first lien loan. This loan, otherwise known as a senior loan, is repaid before any other loan. For example, if a home owner can’t pay their mortgage, the mortgage lender will foreclose the home. When the house sells, the mortgage lender will be the first one to receive money, as their loan was a first lien loan. As all loans, first lien loans have advantages and disadvantages; both sides are compared in this article. (Related topics: unitranche CT lawyer, first lien debt CT attorney)
Advantages of First Lien Loans
- Since this loan is prioritized, it has less risk than other loans. As a result, it has low interest rates.
- These loans can help a company to optimize and protect their shareholder returns.
- When a company applies for this loan, they use their assets as collateral; this helps them to not only get better interest rates, but to optimize the capital cost of debt in their company.
Disadvantages of First Lien Loans
- If a company isn’t able to make their payments, they may lose the assets that they used for collateral.
- Not always, but sometimes the lenders of senior loans may put a lot of restrictions on the company’s capital expenditure, dividends, and acquisitions.
- Companies that take out first lien loans must maintain certain financial ratios. Some of the important ratios include debt-to-cash flow ratio, debt service coverage ratio, and quick ratio.
As you can see, first lien loans have advantages and disadvantages, just as subordinated loans. The big difference between a senior loan and a subordinated loan is that the subordinated loan is paid off after the senior loan. Since it has more risk, it also has higher interest rates. Another option, however, is the unitranche loan. Unitranche loans combine senior debt and subordinated debt, offering an interest rate that’s in the middle of the normal rates for both loans.
If you’re unsure whether you should get a first lien loan, subordinated loan, or a unitranche loan, make sure to ask your Fairfield County attorney for more information. Your Fairfield County attorney will help you to feel confident in the loan that you’re receiving.