Senior term debt, and what an acquisition lender is really lending against

What senior debt is, and why the name matters more than the size

Senior debt is the main loan behind an acquisition. It is called senior because of where it ranks, not because of how large it is. The lender providing it has first claim on the assets and the cash of the business if the deal goes wrong, ahead of every other funder in the structure.

That ranking explains almost everything else about it. Because the senior lender is first in the queue, it carries the least risk of anyone funding the deal, so it is the cheapest money in the structure. Because it is the cheapest money, it is also the most conditional. The lender protects its position with security, with covenants and with a repayment schedule that does not move when the business has a bad quarter.

In an acquisition it is normally a term loan. The whole amount is drawn on the day of completion, it pays the seller, and it is repaid over an agreed term out of the trading cash of the business that has just been bought. Everything else in the structure, the seller's deferred money included, sits behind it and waits.

What secures it, and what it is actually repaid from

Ask a buyer what the loan is secured on and the answer is usually "the business". Ask a lender and you get two answers, and confusing them is where a lot of buyers go wrong.

The security is what the lender can take hold of if the deal fails. On an acquisition that usually means a debenture over the trading company, giving fixed charges over identifiable assets and a floating charge over the rest, a charge over the shares of the company being bought, cross guarantees between the buying vehicle and the target, and a legal charge over any property in the deal. A personal guarantee from the buyer is common, and it is the part buyers think about last and should think about first. What one looks like in practice is set out in personal guarantees explained.

The repayment source is something else entirely. It is the cash the acquired business generates after it has paid everybody who does the work. A lender takes security so that it is not wiped out in the bad case. It lends against cash flow because the good case is the one it is underwriting, and in the good case the security never gets touched.

So the analysis that decides the answer is a rebuild of the profit figure, and the lender does it whether or not the buyer has. It takes the target's earnings, strips out anything that will not repeat, removes the seller's own drawings and benefits, and puts back a realistic market salary for whoever is going to do that work after completion. What is left is the figure the debt has to be serviced from, and it is frequently a long way below the number the price was negotiated on.

Worked exampleTake a business bought for a price negotiated on turnover. Its accounts show earnings of 200,000, but 40,000 of that is a one-off contract that will not repeat, and the seller has been paying themselves 30,000 while doing a job that would cost 70,000 to replace. The lender's rebuilt figure is 120,000, not 200,000. Every covenant, every repayment schedule and every answer about how much can be borrowed is then built on the 120,000. The numbers here are invented to show the shape of the calculation, not drawn from any deal.

How it is priced and put together

Nobody can tell you a rate before a lender has seen the numbers. What can be described is the shape of the pricing, because that part is consistent and knowing it stops the terms arriving as a surprise.

• An arrangement fee is charged on the facility, usually calculated as a percentage of it and usually deducted from the money advanced rather than invoiced separately. A buyer who has budgeted the purchase price to the last pound finds the shortfall on completion day.
• The interest is a margin over a reference rate, most often Bank Rate or a market rate, so the cost moves when the reference rate moves. A fixed rate for the term is sometimes available and is priced for the certainty it gives.
• The facility amortises. Capital comes back in instalments across the term rather than in one payment at the end. A capital repayment holiday at the start is sometimes agreed where the business needs the first months to settle, and it shortens the runway for everything that follows.
• Covenants are tested regularly. A debt service cover test and a limit on total borrowing against earnings are the usual pair, with information covenants requiring management accounts on a set timetable. Breaching an information covenant is the cheapest way to lose a lender's confidence, and it is entirely avoidable.
• The costs around the loan are the borrower's. Lender legal fees, valuation fees, security registration and any monitoring charge are normally paid by the business borrowing, on top of the arrangement fee.

The lender will quote terms once it has seen the accounts and the deal paperwork, and those terms are its own. What is worth knowing beforehand is which of the levers above the lender is willing to move: term length, amortisation profile and the size of any guarantee are usually more negotiable than the margin.

There is also a cost to being small that no amount of negotiation removes. In June 2026 the effective interest rate on new bank loans to SMEs was 6.36%, against 5.42% for UK private non-financial corporations as a whole. That gap is the price of being assessed as a small business, and over the life of a term loan it is why the identity of the lender who ends up looking at your file is worth real money.[1]

Where it sits, and what it is combined with

Senior debt is rarely the whole answer. It is the foundation of a stack, and the other pieces exist because the senior lender will not fund the entire price on its own.

The buyer's own contribution sits underneath it, and how much is expected is covered in equity contribution. Deferred money left in by the seller often sits alongside it and reduces the amount of external debt needed, which is vendor and seller finance. Where a gap remains between what the senior lender will advance and what the deal costs, mezzanine fills it at a higher price because it ranks behind. How those pieces fit together, and the order lenders expect to see them in, is set out in stacking facilities.

Two other facilities usually belong in the same conversation and are routinely forgotten. A business that has just been bought still has to pay staff before it collects from customers, which is working capital, and equipment the target owns outright can often carry funding of its own through asset finance, releasing cash that reduces what the senior facility has to cover.

Who it suits, and who it does not

Senior debt suits a business with a trading record that repeats. Contracted maintenance income, recurring compliance fees, long customer tenure: anything where next year's revenue can be evidenced rather than forecast. It suits a buyer who is bringing a real contribution and who has run something before, and it suits a bolt-on where an existing trading business is doing the buying and can absorb the work.

It is a poor fit in several honest cases. A business whose earnings swing with one contract, one customer or one season will be sized down or declined, because the lender is repaid monthly and the income is not monthly. A target whose value walks out of the door with the seller is difficult, whatever the accounts say. A buyer with no contribution and no sector experience is asking the lender to take the whole risk, and the answer is usually no rather than expensive.

And where the purchase is genuinely about a building rather than a trading business, the right conversation is a commercial mortgage, which is longer, cheaper and secured on the property itself.

What goes wrong

The price was agreed on the wrong number. A multiple of turnover or of gross fees sets a price. Debt is serviced out of what is left after the work is done. When nobody does that arithmetic until the file is in credit, the deal either shrinks or dies at the worst possible moment.

The covenant headroom is too tight to survive normal life. A schedule that works exactly on plan works on nothing else. Ask what a slow quarter does to the cover test before signing, not afterwards.

Nobody funded the gap between paying staff and being paid. The purchase completes, the salaries land immediately, the receipts arrive on the normal cycle, and month three is a crisis in a business that is trading perfectly well.

The guarantee was skimmed. Whether it is capped, whether it is supported by a charge over a home, and what triggers it are all negotiable at the term sheet stage and not afterwards.

The seller left at completion. Where the relationships are personal, a handover that exists only as a promise is worth nothing to a lender, and the reasons are set out in why lenders decline acquisition finance.

What a lender will want to see

Every lender's list differs at the edges, and the core of it does not. Having this ready before anyone asks is the cheapest thing a buyer can do to shorten a deal.

• Three years of full accounts for the target, plus the latest management figures.
• An analysis of income showing what recurs and what does not, with evidence rather than assertion.
• Customer concentration: the largest customers by value, and how long each has been there.
• The heads of terms, including how much is being deferred and on what conditions.
• An integrated forecast for the acquired business under new ownership, with the debt service in it.
• The buyer's own accounts, assets and experience, and where the contribution is coming from.
• An asset list, the lease, and anything that has to novate on a change of control.

The general version of that, in the order a lender tends to ask for it, is our document checklist. Terms that appear on a term sheet and nowhere else are in the glossary.

Getting the file to a lender that reads it correctly

Senior debt is available from a very wide market, and that is exactly the problem. The same acquisition put in front of a lender that has funded your sector before and one that has not produces two different answers, because the second one is learning what your income is worth at your expense.

What we have is the part that is hard to buy: we know this market, and we know specific people who have funded acquisitions in accountancy practices, HVAC and the other trade services sectors and would look at another one.

So you tell us what you are buying and how the money is meant to work. We go to the lenders and brokers who fund that, rather than to whoever is nearest, and we come back to you with who can fund it and what they will want to see.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.