Unitranche financing is a financing solution scheme which involves a mix of equity and commercial real estate loans. It has gained wider acceptance in the UK and Europe, especially in the small to medium size commercial loan market. The key advantages of this alternative financing method are that it provides an attractive, flexible and cost-effective means of funding new commercial projects without placing undue strain on borrowers’ existing business structure and cash flow.
As the name implies, Unitranche finance is a combination of commercial and personal loans, which are then distributed between various units and projects. This structure enables investors to create more flexible working capital requirements by providing a flexible and risk-adjusted solution for financing commercial development. Lenders who provide Unitranche finance also enjoy significant tax benefits over the life of the project, thereby increasing their incentive to offer these services. These benefits enable lenders to provide a range of competitive commercial financing options for their customers.
The concept of this type of financing has its origins in the UK and US, where it has been successfully used in order to finance the purchase of personal property. The main benefits of the model include a higher degree of flexibility with regard to borrower and lender relationships, a wider range of financial solutions available and the ability to reduce the perceived costs and risks associated with commercial real estate loans. In addition to this, it is also well suited to borrowers who may not have enough personal property to secure a traditional line of credit. However, the advantages do not stop here as these financing models are also being used to finance commercial developments in the United States and in the United Kingdom.
As with other commercial finance options, Unitranche finance requires a secured or unsecured loan. A secure loan generally requires the borrower to place collateral against the property that will secure the loan. While this provides some protection for the lender in the event of default, it also poses some financial risks for the borrower by making him responsible for the full value of the property should default occur.
Unsecured loans on the other hand, provide lenders with a greater degree of flexibility with respect to the type of property that is secured against. They do not require the borrower to put up his or her personal property to obtain such loans, unlike secured loans. However, it is important to note that unsecured loans do come with higher interest rates, especially when compared with secured loans. Since the property involved in unsecured loans is typically smaller in size and is not as secure as personal property, there is a higher risk associated with unsecured financing.
With Unitranche, there are several types of financing options available, including a fixed rate structure, rolling over scheme and an annuity scheme. In addition, many lenders offer a number of attractive interest rates and monthly or annual repayment options to suit the needs and preferences of borrowers.