Lien Priority in Bridge Financing: First vs. Second Position and What It Costs You

Every secured loan is backed by collateral. The mechanism that gives the lender a legal claim to that collateral is a lien. Without a properly perfected lien, a lender is an unsecured creditor — last in line in bankruptcy, likely to recover nothing if the borrower fails.

In commercial lending, asset-based lending and bridge financing both depend on liens over specific assets. The lender files a UCC-1 financing statement with the Secretary of State in the borrower's state of organization. That filing puts the world on notice that the lender has a claim against the listed collateral — typically "all assets" for an ABL revolver, or specific equipment and real property for a bridge loan.

The critical principle: the first lender to file has a senior claim. A second lender who files later has a junior claim against the same assets. In a liquidation, the senior lender gets paid first from the collateral proceeds. The junior lender gets what remains. If the collateral proceeds are insufficient to cover both debts in full, the junior lender takes a loss.

This payment waterfall is not theoretical. In manufacturing bankruptcies — which occur in industrial downturns with some regularity — the difference between first and second lien position determines whether a lender recovers 90 cents on the dollar or 30 cents.

Lien priority directly determines pricing. First lien bridge financing for manufacturing equipment typically prices at SOFR plus 350 to 500 basis points, yielding all-in rates of roughly 9% to 13% in current markets. Second lien bridge financing for the same collateral prices at SOFR plus 700 to 1,000 basis points — all-in rates of 13% to 18%.

The $225,000 annual cost differential on a $5 million facility is not trivial. Over an 18-month bridge term, that is roughly $337,000 in additional interest — money that could fund a half-year of payroll for a small manufacturing team. Negotiating for first lien position, or structuring around it, has a direct cash impact.

Priority is established at filing. The UCC-1 is filed electronically with the Secretary of State — in Kentucky, that is the Secretary of State's office in Frankfort. The filing records the secured party, the debtor, and the collateral description. It is publicly searchable.

A lender conducting due diligence before closing will always run a UCC search on the borrower's name and all entity names. Any existing UCC filings must be addressed before the new lender will close. Options include:

• Payoff and termination: The existing lien holder is paid off, files a UCC-3 termination, and the new lender files fresh as the first priority creditor.
• Intercreditor agreement: Both lenders agree to share the collateral pool with a defined priority waterfall. The first lien lender subordinates the second lien lender's claims in writing.
• Carve-out: The new bridge lender takes a first lien only on assets not covered by the existing lien — specific equipment, an acquired property, a new building addition. This requires careful collateral description drafting.

UCC filings also expire if not renewed. A UCC-1 is effective for 5 years from the filing date. An existing lien that was filed more than 5 years ago without a continuation filing may have lapsed — creating an opportunity for a new lender to file as first priority on that collateral.

When a manufacturer has both an ABL revolver and a bridge loan outstanding simultaneously, the two lenders need a governing document that defines their respective rights. That document is the intercreditor agreement.

The typical ABL-bridge intercreditor agreement splits the collateral into two separate priority pools. The ABL lender holds a first lien on AR and inventory — the liquid, self-liquidating assets that match the revolver's short-term nature. The bridge lender holds a first lien on equipment and real property — the fixed assets that support the bridge's longer term. Neither lender is technically subordinated to the other; they each have a first priority claim on a different asset class.

This split-lien structure is more complex to document but avoids the pricing penalty of true second lien subordination. Both lenders get a first lien on their respective collateral, and the intercreditor agreement governs cross-default provisions, cure periods, and liquidation proceeds waterfall if both collateral pools need to be sold simultaneously.

Standstill Provisions

Where one lender is genuinely subordinated — a true second lien structure — the intercreditor agreement typically includes a standstill. The second lien lender agrees not to exercise remedies (foreclose, accelerate, demand repayment) for a defined period after a default event — typically 90 to 180 days. This gives the first lien lender time to enforce their collateral rights without interference from a junior creditor racing to the same assets.

During a standstill, the second lien lender can still vote in a bankruptcy, protect their interests in court, and ultimately purchase the first lien at par to take control of the enforcement process. But they cannot independently foreclose or demand payment while the standstill is in effect.

For a broader look at how bridge loans are structured for manufacturing equipment purchases, see the guide to bridge loans for manufacturing equipment.

Manufacturers approaching bridge financing with an existing ABL revolver have more room to negotiate lien position than they often realize. The key is understanding what each lender actually needs.

An ABL lender needs a first lien on AR and inventory. They do not need a lien on equipment or real property — those assets are not the source of their repayment. In most ABL credit agreements, the lender's UCC-1 covers "all assets" as a matter of course. But they will often agree to a carve-out or partial subordination on equipment and real property to allow a bridge lender to take a first lien on those specific assets.

The negotiation involves:

1. Requesting a "silent second" or "carve-out" from your ABL lender on the specific collateral the bridge lender needs
2. Getting the ABL lender to sign a consent to the new security interest — lenders call this a landlord waiver or bailee letter, depending on the asset
3. Drafting the bridge lender's UCC-1 with a precise collateral description limited to the identified assets, rather than "all assets"

Your ABL lender has incentive to cooperate. If you cannot close the bridge loan because they will not carve out the equipment, the manufacturing expansion does not happen, your revenue does not grow, and your ABL borrowing base does not expand. A cooperative ABL lender sees the bridge as a complement to their facility, not a threat.

The LTV on the bridge loan also matters. A lender advancing 55% of the appraised OLV on equipment has a substantial cushion before their collateral is impaired. That cushion is part of the price justification for first lien status — lower advance rate, lower rate premium required.