Unitranche financing or debt represents a non-recourse hybrid loan arrangement that mixes several other loans into a single, with a low introductory rate for the committed loan holder that sits at the opposite end of the spectrum from the other loans. More commonly, unitranche debt is used in commercial funding transactions since it enables the investor to obtain the capital of multiple borrowers at once. This option is only available if the individual loans are underwritten by a lending institution and not a unitranche broker. The income risk on the individual assets does not exceed the income risk on the underlying loan, so it is a “smart” loan. It gives the lender the opportunity to spread risk without incurring significant additional costs.
Investors that are looking for a relatively safe yet lucrative vehicle to finance their acquisition as well as growth projects should consider investing in syndicated units as opposed to unitranches. A syndicated debt arrangement consists of three financing types: A debt offering, a common equity loan and a convertible debt offering. In this article we will discuss the characteristics of the three types of financing.
Unitranche debt for small business acquisition
The most effective financing type for small business acquisition and growth is a syndicated unitranche debt investment. The benefits of a syndicated debt structure are that it combines senior debt with working capital and is funded by a syndicate of lenders rather than a single lender. The interest rates are usually a little higher than those of a traditional financing loan since it combines senior debt with working capital. The downside of a syndicated debt structure is that the investor who is borrowing the funds has less protection against default when compared with a traditional financing loan. When an investor does not repay the debt, the syndicate is obligated to pursue the debt through all appropriate means.
In contrast, a common equity loan is generally offered to a single borrower and offers low interest rates since the interest rate is fixed by the issuing financial institution. It is also relatively easy to qualify for a common equity loan since it requires only a 10% down payment. Unlike a unitranche debt investment, the lending party provides protection against a borrower defaulting. This protection is provided by a second lender or investor.
Available for buyers of debt structures
A convertible debt instrument is another option available for buyers of debt structures. In a convertible debt structure, the borrower pays into an account a predetermined amount of money over a specific period of time. When the agreed upon amount of money is repaid, the borrowers unitranche debt becomes due and the holder of the loan is able to sell the debt to another financial institution or investment firm at a discount if the original loan amount is still outstanding. The main drawback of a convertible loan is that only very small percentages of the original loan are paid out to the buyer of the debt and this means that a greater percentage of the loan is already owned by the seller.
Private equity is a method of creating working capital by collecting funds from a limited number of investors and use the collected funds to make investments. Unlike a bank loan, which all investors have access to, private equity investment is controlled by a limited number of investors. When a private equity investment occurs, the debt is usually created through a short sale or an exchange of one security for another. The primary difference between a unitranche loan and a private equity finance is that a private equity financing requires a large amount of credit, often in the thousands of dollars, whereas a unitranche loan typically does not require more than $100 as capital. The debtor must also be actively motivated to repay the debt.
Doesn’t require additional credit facilities to be obtained
Many people believe that a unitranche structure is a bad choice for smaller businesses because it limits their ability to increase their cash flow. However, this line of credit is perfect for these types of businesses because it does not require additional credit facilities to be obtained. This is because most private equity investors do not like to lend large sums of money unless they are absolutely sure the business has enough potential for growth. Also, many small businesses will need some form of collateral in order to secure the capital from the investor in the case of default. With a unitranche structure, there is no risk to the business owner since the only thing the investor stands to lose is the interest earned on the loan.
Unitranche loans are often used for early start-up companies that need enough funds to pay for equipment and other costs before the business becomes profitable. These loans are also often used for new businesses with little revenue as well. If you are interested in obtaining one of these loans, the key is to ensure that the company you are applying for is in good enough condition to support the monthly payments on the loan. While there are no strict requirements for a company to meet in order to receive a loan, most lenders will require a certain level of experience, debt-to-equity ratio, and a five-year track record of paying back debt.