When it comes to obtaining a business loan there will usually be a number of options. In many cases a standard loan will not be suitable and some type of structured finance may be the best option. This type of loan is given based on the performance of the company in the past. This means that there is not the need to provide collateral in the same way as would be required with other types of loan. So long as the company can show a good cash flow in the past they can use this to secure the loan. Of course for it to be convincing to lenders this cash flow will need to have been consistent and enough to pay off any future repayments on the loan.
How Structured Finance Works
If a company does not have a lot of assets that they can use as collateral they may struggle to borrow money. They can get around this limitation by showing a good history of cash flow and a reliable customer or client base. If the conditions are right there will be investors who are willing to put up the needed money. In a lot of cases they will be willing to provide this money at an interest rate that is lower than what the banks will charge. The other advantage of structured finance is that it tends to involve a lot less red tape than what could be expected with traditional lenders. If a company needs cash in a hurry then it just makes sense for them to attempt this type of financing.
Even strong companies can go through rough periods where things look a bit rocky. Such tribulations can wipe out their spare cash and this leaves them in a position where a cash injection is required in order to continue, such as a leaseback. This is another time when structured finance will be a good option. Convincing lenders, such as banks, to hand over cash can be difficult if a company is struggling, but investors can be far more understanding. Those companies that make bad investment decisions can also pay off their high-interest debts using structured finance — that way they will pay back less money in the long run.
Some Final Thoughts on Structured Finance
In recent years of economic woes there have been many companies who have struggled to stay afloat. A much higher percentage of these businesses would have likely gone under if it wasn’t for the availability of structured finance. Banks and other financial institutions have become highly cautious when it comes to lending money. Unless a business can offer plenty of collateral they might struggle to get any type of loan from these entities. Having the other option of structured finance offers a lifeline to these firms. The investors offering this type of finance are far more understanding about risk and can see that if the company is able to produce x amount of cash flow they will be able to make good on any loan they receive.
