Imagine a waterfall cascading down into vertically aligned buckets. The water represents money and the buckets represent creditors. The water fills the first bucket first. The second bucket will fill only after the first is full. More buckets are filled in the order in which they appear as the water flows. 

A waterfall payment structure works this way with creditors. Debtors typically structure these schemes into such tranches to prioritize the highest-principal loans first because they are also likely to be the most expensive.