Second Lien Business Loans – Definition, Risks and Benefits

A second lien loan is a secured loan tied to one of the company’s assets, specifically an asset that already has a first loan attached to it. The asset could be the firm’s inventory or equipment, or it could even be the business owner’s own home. The second lien takes second priority if the borrower defaults on his or her debts. In the event the company has to be liquidated, the owner of the first lien loan will get reimbursed first, and the second will get whatever proceeds are left over from the sale of the associated asset.

Most businesses experience times when they desperately need some cash to bridge a gap in funding. This could be during a period when capital has gone out to inventory or filling new orders but accounts receivable have not yet been collected from big accounts. It could also be during a seasonal low. Whatever the reason, among the few financing options available to businesses, a second lien loan may be the right choice.

Risks and Benefits of Second Lien Business Loans

Because it is in a subordinate position to getting repaid in the event of default, the lenders’ risk is greater with second lien loans than with first liens. For that reason, interest rates on second lien loans will be significantly higher. While this is more expensive, second liens are often designed to be short-term loans to be paid off in a matter of a few years. Sometimes the need for that immediate working capital injection is enough to take on the higher cost and risk.

The responsibility of a second lien should not be taken lightly, however. If a business owner fails to come up with the repayment funds in time, whatever assets are tied to the loan could be lost, even if the owner is able to keep up on the payments of the first lien loan. The risks are real, but when cash is needed during a short window with a definite plan for repayment, a second lien loan can be the right solution.


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