Payment waterfall

Definition

A payment waterfall is the contractually agreed sequence in which available cash is applied — typically fees and costs, then senior debt, then subordinated debt, and finally equity.

In plain terms

It is the pecking order for cash. Each tier is paid in full before the next receives anything, which is why senior lenders accept lower rates.

Why it matters for your company

Where a facility sits in the waterfall drives its rate and risk. In distress, the waterfall mirrors the insolvency priority of payments. See intercreditor agreements.

In practice

Picture a UK limited company with a senior facility from its main lender and a smaller subordinated or shareholder loan sitting behind it. When cash comes in — whether from trading receipts or a refinancing event — the waterfall tells the finance director exactly what gets paid first: fees and costs, then the senior lender's principal and interest, and only after that any junior or subordinated claim, with equity holders last in line.

For the company, the practical effect is that the senior facility's terms are agreed on the assumption it will be repaid ahead of everything else. A director negotiating a second facility needs to understand where it will sit in that order before assuming it carries the same risk profile as the first, since its position in the waterfall — not just its stated rate — is what shapes the lender's willingness to fund and on what basis.

How lenders read it

A lender assessing a proposal looks closely at where its own facility would sit in the waterfall relative to any existing debt. A facility that ranks senior, ahead of other creditors, is viewed differently from one that would sit behind an existing lender under an intercreditor agreement, because the waterfall determines who is exposed first if things do not go to plan.

This is also why lenders ask searching questions about existing borrowing before agreeing new finance: stacking multiple facilities without a clear, agreed waterfall creates uncertainty for everyone in the structure. A well-documented order of payments, consistent with the priority of payments that would apply on insolvency, gives each lender a clear view of its own position and helps a company present its borrowing history coherently when it next seeks funding.