Education

What is Structured Debt?

2 Jun 2021

Structured debt looks at larger more complex business scenarios and finds a tailored solution specifically for the borrower to help finance their business. It offers a structured lending solution for businesses of all sizes, whether that's for business expansion plans, merging with other businesses, for commercial mortgages or for trade finance facilities.

What is Structured Debt?

Structured debt deals with financial lending instruments that work to mitigate serious risks related to complex assets. For most businesses, traditional tools such as mortgages and small loans are a great funding option. However, borrowers with greater needs, such as mid-market businesses need structured debt to deal with complex and unique financial instruments and arrangements to meet their substantial financial needs. Typically, these would include Manager Buyouts or Leveraged Buyouts.

We explore why businesses often consider structured debt as a good longer-term finance option and the benefits it can offer.

What structured debt means for businesses

Structuring debt typically means a mix of different financial instruments to cover the total amount of funds needed. The overarching goal with all of them is to supply investment or capital to a business to help them grow. Structured debt often includes great incentives and benefits such as equity components, scalable solutions, royalty based repayment methods and restructuring plans designed to support businesses as they grow. 

Why would a business use structured debt?

So, why would a business need to use structured debt? Well, not only is structured debt a great way for a company to restructure its debt and help make savings on repayments, but it also helps to free up working capital which makes cash work as efficiently as possible.

Another great example of structured debt is growth funding, which as the name suggests helps businesses achieve their growth plans. This could be through acquisition of another business, restructuring of the existing business, developing product lines or anything that best helps them achieve their expansion and growth plans.

Structured debt is also a great option for companies that operate in different jurisdictions and trades globally, keeping the cash flowing within the business instead.

Examples of structured debt products

There are many different structured debt products available, and they typically depend on the individual needs of a business. Here at Funding Options through our panel of lenders, we can support customers with getting funding with the following structured debt products:

Acquisition finance

Available in 3 main options, acquisition finance is a form of capital used for the purpose of purchasing an existing business. The person or team acquiring the company can contribute to a down payment from their own funding, but business finance is typically used to cover the bulk of the purchase. Three of the different types of acquisition finance available are;

  • Asset finance – when businesses fund a percentage of acquisition using asset refinancing, which releases cash from the company’s assets for example, from property or machinery

  • Term loans – often seen as being a more traditional term loan option, businesses receive a lump sum to cover the purchase and pay it back with interest over an agreed period. 

  • Mezzanine finance – if a business owner needs a little more cash to get their acquisition over the line, mezzanine finance provides the ideal short-term finance solution. 

Management Buy-in (MBI)

Management buy-in is when an outside management team buys a company to help improve performance. Management buy-ins happen a lot in larger businesses and firms, often due to underperformance or even being undervalued as a business. If you’re part of an external management team looking to buy a company, it’s highly likely you’d need a form of business finance alongside any equity finance you’ve raised.

In recent years, there has been a growing number of alternative lenders specialising in MBI finance, including lenders from our own panel.

Management Buyout (MBO)

A management buyout, known as an MBO, is when a company’s management team purchases the assets and operations of the business they manage. As the team is already internal, it can make the buyout process easier as you’ll already understand the processes. There is a range of finance options available to help facilitate the sale and purchase of the company you are acquiring.

Leveraged Buyout/Buyin

Leveraged buyout’s and buyin’s happen when an outside management team joins a company whilst also buying out the existing management team. This type of leveraged buyout, or LBO, is used to help streamline the transition between business owners with as little interruption to business operations as possible. If you’re purchasing a company as an individual or part of a management team, it’s unlikely that you’ll be able to meet all upfront costs on your own. 

Alternative finance options like asset finance, mezzanine finance and business loans can also help. Whilst there are other examples of structured debt, these are the ones most commonly used by our own lending panel.

The benefits of structured debt

One of the main benefits of structured debt is the amount of money lenders are able to offer mid-market businesses who need help. Using this type of funding means the businesses can expect loans in the millions. Businesses can therefore benefit from a huge injection of capital, to help more complex companies to evolve quickly.

Another benefit of structured debt is that it can help rejuvenate business models. By changing management teams or merging two businesses together, for example, it means internal management teams are replaced or disbanded, allowing for progression and organisational changes to happen.

As structured debt products are nearly all non-transferable, structured debt can’t be moved between different kinds of debt like a normal loan, as it involves the hiring of a management team. This means businesses must understand the agreement and what’s expected. It makes it easier to help debt management too as it’s one loan, not several, to keep track of.

Our lending panel of 120+ lenders can support loans of up to £15million. Looking for finance? Our expert Business Finance Specialist’s will guide you through the whole process.

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