Finance, Get Funded

What is Structured Finance?

Business Advice | 4 April 2023 | 1 year ago

There are a lot of different finance products out there, many of which give businesses and organisations access to capital. Sometimes, a standard loan is the way to go, but an increasing number of corporations are using structured finance. In this blog, we have taken a look at structured finance and how it works for businesses.

What is Structured Finance?

Structured finance is a type of financial engineering that uses complex financial instruments to fund investments or raise capital. It’s a way for emerging markets to manage risk. It’s typically aimed at borrowers, most of which are corporations, who have specific needs that are unlikely to be satisfied by a standard loan. The majority of traditional lenders do not usually offer structured financing, and it’s a highly specialised area of finance.

How Does Structured Finance Work?

Though there is a lot that goes into structured finance, it’s not as complicated as a lot of people assume it to be. Structured finance involves pooling together complex assets and then dividing them into tranches, which is done based on their risk profile. The debt holders of these tranches receive payments based on their risk exposure and the performance of the underlying assets. Structured finance enables financial institutions to manage risk, raise capital and provide liquidity to the markets.

As structured finance is used as a way to get a lot of capital into a business or organisation, investors are involved, and it’s not the same as simply asking a financial institution for a loan. You cannot transfer structured finance products, and they cannot be moved around in the same way that a loan can.

Should You Take Advantage of Structured Finance?

Whether or not you should take advantage of structured finance is a complicated question to answer, as it really depends on the unique circumstances of your project. Though structured finance is suitable for large or small projects, the benefits and risks are complex. This is why it’s always a good idea to seek the help of a financial adviser, who can help you to weigh up the pros and cons of structured finance for you.

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