Debt structure explained
Structured debt offers an alternative lending solution to businesses who want to merge with another business, invest in more property or staff, or finance trade needs. It offers a tailored financial solution to more complex business lending needs, helping mid-market businesses secure the finance they need to grow.
The benefits of structured debt
As well as the opportunity to grow rapidly, structured debt offers lenders an investment opportunity, making them more likely to offer financial support. Some of the other key benefits of structured debt are:
Mid-market businesses
Offers more finance options for complex mid-market businesses compared to traditional lenders,
Merge
Opens up the opportunity to merge with other more profitable or experienced businesses via merging.
Investment
Creates an investment opportunity for both business and lender.
Capital injection
Offers a bigger capital injection.
Nearly all non-transferable
As structured debt products are nearly all non-transferable, structured debt can’t be moved between different kinds of debt like a typical 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.
Amount of funds lenders are able to offer
One of the main benefits of structured debt is the amount of funds lenders are able to offer mid-market businesses who need help. Using this type of funding means 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.
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Types of structured debt products
Flexible instrument
Structured debt is a flexible instrument which means it can be tailored to suit your individual business needs. Our own panel of lenders here at Funding Options can create products to help support our customers using the following products
Management buy-in (MBI)
Businesses can choose a management buy-in as part of a plan to help improve a company’s financial performance. Management buy-ins are when an outside management team buys a company in the mindset of using their own experience to help a business that may be underperforming or currently undervalued.
Companies who offer management buy-ins will need a form of business finance readily available, alongside any equity finance you might have raised.
Management Buyout (MBO)
Management Buyout or MBO’s, work in the opposite way of an MBI as the company’s existing management team will buy the assets and general operations of the business they already work within. A buyout can be an easier way for a business to structure its finance as the management team will understand 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.
Leveraged buyout and buy-in
Leveraged Buyout and Buy-in are both types of funding that offer internal and external management teams support. Leveraged Buyout and Buy-ins are when a business seeks to fund a large proportion (normally more than 90%) of the purchase with debt. This type of leveraged buyout, or LBO, is used to help the transition between business owners with minimal interruption to business operations and staff.
Purchasing a company
If you’re purchasing a company as an individual or even as part of a management team, it’s unlikely that you’ll be able to meet all upfront costs on your own so it’s important to understand the implications of leveraged buyout and buy-in. This funding type differs from a normal MBO or MBI in that the business contributes some of their own capital, use some of the business assets or gets private equity.
Acquisition finance
Acquisition finance is a form of capital used solely for the purpose of purchasing an existing business. The team or people buying the company can use some of their own funding as a down payment, using business finance to then make up the rest of the purchase. Under acquisition finance sits asset finance, term loans, and mezzanine finance.
Asset finance
Asset finance when businesses release cash from the company’s assets for example, from property or machinery.
Term loans
Term loans are often seen as being a more traditional loan option. Businesses will receive a lump sum to cover a purchase then pay it back over a set term with interest.
Mezzanine finance
Mezzanine finance provides the ideal short-term finance solution for businesses if a business owner needs a little more cash to get their acquisition over the line.
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Calculations are indicative only and intended as a guide only. The figures calculated are not a statement of the actual repayments that will be charged on any actual loan and do not constitute a loan offer.
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Financial product information
Representative example*
• 7.63% APR Representative based on a loan of £50,000 repayable over 24 months.
• Monthly repayment of £2,252.94. The total amount payable is £54,070.56
*Some lenders may apply fees during the application process, please note that these are set and provided by these entities.
Annual Percentage Rates
Rates from 2.75% APR
Repayment period
1 month to 30 years terms
What is structured debt?
A mix of different financial debt products
Structured debt typically refers to a mix of different financial debt products which are designed to sit alongside one another to cover the total amount of funds needed. The overarching goal with structured debt is to supply the capital to aid business growth.
Royalty repayment methods
Structured debt also offers great benefits for businesses such as royalty repayment methods and restructuring plans that accelerate profits and growth.
Capital injections
This type of business finance is used to help inject substantial amounts of capital into larger or more complex businesses, structured debt is often a funding option used by SMEs which are looking to scale their growth plans, develop new product lines, refinance existing debt, acquire other SMEs or restructure shareholding.
Why would businesses choose structured debt?
The chance to grow
Structured debt finance options offer most SMEs and mid-market businesses the chance to grow significantly, whether it’s via management buy-out or refinancing existing debt, which makes it a very appealing option for ambitious businesses in the UK. As with all funding options, it’s down to each business to make an informed decision about their financial position and the options they should apply for.
Increase working capital reserves
Many mid-market businesses choose structured debt as a way to increase working capital reserves within their business, helping to create efficient cash flow whilst making savings on repayments. Structuring their debt with finance options such as mezzanine financing offers a flexible option for lenders who are able to convert equity interest if the loan repayments aren’t made. It’s the flexibility that some structured debt facilities offer which appeals to both SMEs and lenders as it means neither would lose out if the business fails.
Expertise and guidance
Businesses often choose structured debt options to help develop to the next level through refinancing options, acquisitions or mergers and other flexible options available. Making these significant business moves takes some consideration from both business and lenders, so middle market companies often rely not only on flexible financing solutions, but the expertise and guidance lenders can offer as SMEs take the next big step in their business journey.
Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.
It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.
Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.
