Structured finance: combining debt to fit your business

Structured finance is the practice of building a funding package from more than one layer or type of debt, instead of relying on a single loan. A typical structure might combine a senior term loan secured on the business's assets, a revolving or invoice-based facility for working capital, and a smaller, higher-cost layer of subordinated debt that ranks behind the senior lender. Each lender's rights are set out in the facility documents and, where several lenders are involved, in an intercreditor agreement that fixes who is repaid first.

The aim is to raise more, or on better terms, than any one product could provide, while keeping repayments within what the business can comfortably carry.

Structured finance suits established, profitable businesses with a clear purpose for the money and enough scale for the extra legal and reporting work to be worthwhile. It is common in acquisitions, buyouts, refinancings and growth plans. It is less suitable for start-ups, very small facilities, or businesses without reliable management accounts; a straightforward term loan or revolving credit facility is often simpler and cheaper.

Lenders typically ask for three years of accounts, current management accounts, forecasts, aged debtor and creditor reports, details of existing borrowing and, for deals, heads of terms. Structured facilities usually take longer than a single loan, often several weeks to a few months, because of due diligence and legal documentation; indicative terms can come within a few working days in straightforward cases. Security is commonly a debenture with fixed and floating charges, specific charges over property or assets, and often personal guarantees, with each lender's priority set in an intercreditor agreement.

Costs vary by layer: senior debt is cheapest, and subordinated or mezzanine layers carry higher margins to reflect their risk. Expect a mix of interest (often a margin over a reference rate), arrangement fees, monitoring or non-utilisation fees on revolving lines, legal and due diligence costs, and, on some junior debt, exit fees or rolled-up interest. Larger facilities may include financial covenants, such as cover and leverage tests, that must be reported regularly.

If debt alone is not the right answer, equity investment may be considered; our guide to debt vs equity funding explains the trade-offs (we arrange debt, not equity). Simpler options include a single term loan, a revolving credit facility, or refinancing after an acquisition once a deal has bedded in.