What is Structured Finance?
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.
fantasy finance - as Les Leopold put it.
I need a process manual for structured finance department of a bank. Thank you.
a very good snapshot of finance to non-financials.
Great article, easy to understand and well structured. :-) however, after the financial crises, many banks are using this mode of refinancing to get rid of past due accounts.
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