Waterfall
Draft definition. Technical and editorial approval pending.
The documented order in which collected cash is applied among fees, interest, principal, reserves and residual amounts. The waterfall determines when you receive anything and what must be paid ahead of you. Its order can change on specified triggers, so read both the normal-period waterfall and any alternative ordering that applies after a trigger event.
In practice
In a fictional month, USD 400,000 of collections pays the agreed servicing costs and interest, then required principal and reserves. Any permitted remainder reaches the equity holder. Under a separate amortization waterfall, more cash may be directed to principal. Read both orders rather than assuming priority expenses disappear after a trigger.
Read this in context: Anatomy of a Deal.