As part of their growth strategy, companies are often looking for new ways to finance their core business. They opt for alternative sources of financing, off-balance sheet solutions or for an improvement in their cash flow by injecting cash. Structured financing can frequently meet their needs. But how and why? Find out in this article. Here are the answers to the 5 most frequently asked questions about him.
What does Structured Financing Mean?
Structured financing is a solution that helps the company finance specific assets and/or projects. It can take the form of a combination of several funders and risk takers, such as equity, subordinated or mezzanine loans, ordinary loans, rate hedges and risk insurance. Each source has a risk profile, which has implications in terms of partner types and pricing. It offers two models: one based on a loan, the other on a lease. Structured financing through a bank loan is most often implemented in the context of large long-term projects, acquisitions or intangible assets. In this case, physical assets, bank accounts and cash flows are often required as collateral. Funding can be less than 100%. Through a leasing contract, it mostly deals with the financing of professional equipment, without any additional warranty requirement. In principle, this is 100% financing, long-term financing at a fixed interest rate. A residual value may, if necessary, be taken by the lessor, thus posing a risk of recovery.
We will focus here on the second form of structured financing.
What type of Company opts for structured financing?
There are three types of companies that are interested:
Companies with a capital-intensive core business are in constant demand for financing solutions. We are thinking here of companies active in the field of energy (solar panels, wind turbines, etc.), production companies, the telecom sector, logistics companies that constantly optimize their processes or those that position their products as services ("as a service") and who need physical assets to deliver them (their assets generate revenue). Funding issues will be the focus of management."
Companies in sectors that need to innovate. Take the retail sector. Innovation is strongly linked to improving the customer experience or optimizing their resources (energy management, for example). These companies will have to quickly invest in digital signage, mobile solutions, smart lighting, remote control systems, etc. These operational constraints, these perpetual developments, are campaigning to leave the ownership of the assets to a third party and instead to focus on their uses.
And finally high-growth companies. Although there is now a lot of liquidity in the market, and as a result banks are more inclined to lend, each company has a credit or outstanding limit. A single bank will not and will never cover all investment applications (its exposure to risk would be too high). The structured financing solution proposed by an independent leasing company can present an attractive alternative for the general management (diversification of sources of financing, access to new banking partners without having to grant them side business, flexibility and management of the offer).
These three areas of application are of course very intertwined.
How important is structured financing?
Unfortunately, we do not have market figures for structured financing. The furniture leasing market reached 5.1 billion euros in 2016, an increase of 22.3%. Furniture leasing for industrial machinery and miscellaneous equipment has grown strongly and has increased between 2010 and 2016 from 1.159 billion euros in 2010 to 1.547 billion euros in 2016, with an acceleration in growth last year (up 16.9%). An analysis of the figures based on the value of contracts reveals that growth between 2015 and 2016 took place at all levels. We note remarkable growth for contracts with a high value: a 25% growth between 2015 (5,441 contracts) and 2016 (6,813 contracts) for contracts between 100k euros and 1 million euros, and growth of more than 50% for contracts over 1 million euros. These figures show that leasing is popular to finance its investments.
What are the benefits of structured financing?
We are talking about both financial and operational benefits; the merits of traditional leasing (outsourcing management, allocating equity to core assets, etc.) remain valid. Companies and organisations that opt for a structured financing solution based on leasing exempt themselves from a cash asset to the implementation/realisation of the project benefiting from a spread of the burden over the duration of the lease. The rental solution also offers the customer the opportunity to match rental deadlines with the rise of the project, the seasonality of the activity, the income generated by the assets, etc. Finally, as mentioned above, they also gain access to alternative sources of financing in addition to their existing lines of credit. Structured financing helps cover changes in interest rates, spreads credit risk and diversify sources of funds.
From an operational point of view, companies that opt for a structured financing solution based on leasing can fully outsource the management of their assets and the recording of their invoices. In addition, all hardware, software and service costs (insurance costs, installation and maintenance) are grouped into one contract, which has management benefits and increases visibility on cost management.
As a company, when is best to choose structured financing from a bank or independent lender?
It is not a matter of exclusive choice. By opting for specific financing of their assets, companies can segment their sources of financing. This allows companies or organizations to use banks for working capital, acquisitions, vat, goodwill, factoring, etc., while using leasing for their physical assets. Leasing offers opportunities for sale and lease-back and also more freedom for all matters relating to guarantees and autonomy: the banker who has a guarantee on trade funds as collateral will sooner or later have an impact on management. In the case of bank loans, covenant clauses are included in the contracts and must be respected, whereas leases rarely include such clauses. Let's say a company's financial situation is not changing well. There is a risk that the bank will require the loan to be prepayed. This usually leads to the cessation of other investments, the rapid resale and the sell-off of assets, etc.
A leasing company will have very little influence on the company's key decisions. In addition, a leasing solution will be well suited for tangible core and innovative assets, assets that require active fleet management, depending on their technological and economic lifecycle, and knowledge of second-hand markets, areas in which banks are less comfortable.