What Are Structured Loans?
The term "structured loan" can be applied to a number of different scenarios. This term is widely misunderstood, leading to some confusion. In its most accurate definition, a structured loan is a business loan given based on a company's performance. It takes into account cash flow more than asset base, and it can be a creative financing tool to overcome challenges in the business cycle.
The main purpose of a structured loan is to fill in gaps where other loans will not meet a business' needs. Most business loans require good credit and a solid asset base in order to be approved. A business that has recently defaulted on a loan or suffered losses in a lawsuit, for example, will have difficulty meeting these requirements. A high-risk lender or investor can review the company's performance and business plan. If that lender decides the business has the money to take on a new debt, it can issue structured financing at a high interest rate. The possible profit to the lender is high to compensate for the added risk.
For a borrower, the main benefit of structured loans is the chance to get financing when traditional loans will not work. The business may be looking to expand, acquire another company or simply need some cash for immediate operations. For a lender, the profit can be high. It is even possible for an investor who would like to be paid in equity as well as cash repayment to step in. This gives the investor a chance to earn even more than flat interest could provide.
A structured loan is typically fairly short term, maturing in just a few years. High monthly payments and high interest rates make these loans expensive. It is this structure, however, that puts the burden of risk on the borrower, allowing the lender to issue a loan to a borrower who is not quite qualified.
Do not confuse "structured loans" with "structured settlement loans." The former is a business loan described above. The latter is a personal loan often made so a plaintiff in a lawsuit can collect a loan against a future settlement. These two terms mean very different things despite often being used interchangeably.