Second lien is secured debt that ranks behind senior (first lien) lenders when a borrower sells assets or goes through a distress process.

How it works

Senior lenders typically hold a first-priority claim on collateral — accounts receivable, intellectual property, or all assets. A second lien lender also takes a security interest but agrees to stand behind the senior facility. In a workout, senior debt must be repaid (or restructured) before second lien holders recover meaningful cash.

Companies use second lien to raise incremental capital when senior capacity is tapped or when equity holders want to avoid new dilution. Terms include higher coupons, OID, warrants, or equity kickers to compensate for subordination.

Intercreditor agreements govern who can enforce remedies, how proceeds split in a sale, and whether second lien can block certain actions. These documents matter as much as the rate.

Why it matters

• Founders: Layering debt increases fixed obligations and can constrain future financings. Legal and CFO review of lien priority is essential before signing.
• Investors: In growth and buyout deals, stacked debt affects exit proceeds. Preferred equity may sit below secured debt in a bad outcome.

Common mistake

Treating second lien like “cheap equity” without modeling a downside where senior lenders consume most collateral value.

Related ideas

• Senior debt
• Security interest
• Venture debt and covenant structures