World of Structured Finance
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When more conventional methods of obtaining a business loan are either
undesirable or not possible, there is always the option of structured finance.
Structure finance essentially is the process of making a loan based on a strong
performance in cash flow in the past. Rather than other assets being used as
collateral for the loan, funds are advanced based on the history that indicate a
consistent flow of cash into the borrower’s business that will allow for the
timely and orderly repayment of the loan amount. Here are some examples of how
structured finance may be the right option in a given situation.
The use of structured finance can be attractive to a business that does not have
much in the way of material assets, but does have a strong client base and a
documented history of monthly billing coupled with consistent pay histories of
the customers. Investors are often willing to lend money to corporations of this
nature, even if they may be rather small, and do so at a lower rate of interest
than a standard bank loan. For the business that is looking to expand the client
base, and needs some quick cash to do it, structured finance may represent the
most cost efficient way to manage the fund raising. Along with the low amount of
red tape involved with structure finance, this option also can move very
quickly, often much faster than obtaining a standard business loan.
Structured finance is also an excellent way for a company that is emerging from
a rough period to get the operating capital it needs to get back on its feet and
begin to grow once again. For example, a company that enters a merger that turns
out to be bad spends a great deal of resources to legally reverse the situation.
While the cash flow from customer orders remained stable throughout the process,
the company now is shouldered with a large amount of debt at high interest
rates. Using structured finance to eliminate the higher interest liabilities,
effectively exchanging them for lower interest and more manageable repayments,
can be the answer. While the traditional finance sector may be hesitant to loan
funds to companies emerging from this sort of situation, a structured finance
scheme would take into account the stable and consistent cash flow from customer
orders and consider the corporation a good risk.
Structured finance can be considered a mode of CDO, or collateralized debt
obligation. CDOs are basically a kind of structured credit product that is idea
when there is some transfer risk with a company, but there is also potential for
growth. Structured finance is ideal when the element of risk transfer makes an
appeal to conventional finance sources unproductive, unattractive, or simply
impossible. With the use of structured finance, many companies are given a
chance for new life that would not have been possible otherwise.
