Since being introduced to the market in 2005, unitranche financing has drastically changed the lending industry for small and medium-sized enterprises. Developed out of a dire need for more flexibility in small business loans, the popularity of unitranche financing boomed after the 2008 financial crisis and has become a widely viable solution for many companies today.
When the pressures and challenges of running operations were at an all-time high, alternative lenders responded with a new loan structure that combined different types of loans into one to alleviate many of the complications in obtaining liquid capital. What were the specific challenges that SMEs faced, and how did unitranche financing address those concerns?
Need for More
Before the unitranche structure was created, there was a severe gap in access to financing for companies in the lower middle market. Larger, more established businesses are able to work with banks for funding because they have the assets, credit history, and revenue to meet the strict requirements of traditional lenders. However, SMEs often have unique circumstances that cannot be accommodated by banks.
Whether it be lack of collateral or unsatisfactory credit score, SMEs encounter numerous difficulties in getting approved for the loans they need to sustain their operations or grow their company, despite other promising prospects. Even for companies that happen to meet the banks’ criteria, the terms for traditional loans are typically narrow and uncompromising, making it harder for businesses to find solutions that align with their objectives. Consequently, businesses had to face the challenges of juggling multiple debt agreements with various lenders to meet the full extent of their needs.
This barrier became more significant after the 2008 financial crisis when banks further tightened their requirements for a loan. The recession caused more than 170,000 small businesses to shut their doors between 2008 and 2010, and for many companies still alive that needed capital, traditional loan structures were either unobtainable or prohibitive. As the demand for more flexible options intensified, unitranche financing entered into the mainstream of alternative lending. Unitranche loans were built to combat the rigorous structure of traditional loans and increase access to capital on more favorable terms.
Simplicity of Structure
The main game-changing element of unitranche financing is the unparalleled simplicity of its structure. Unitranche loans involve a single credit agreement and a single security agreement to eliminate the need for multiple debt securities or loan tranches. It removes the obstacle of trying to obtain capital from several different lenders, which middle-market companies would frequently resort to.
When a borrower has to work with multiple facilities, there is an intercreditor agreement between the lenders, which can cause complications for the borrower. For example, a borrower may be subject to differing consent requirements from each lender if they want to take certain courses of action related to the loan. Unitranche financing allows companies to bypass this hassle because borrowers only need to deal with one lending party.
The simplicity of a single hybrid structure increases the flexibility of terms for the borrower, and it generally leads to greater speed and certainty of loan closure to benefit the borrower’s circumstances. Ultimately, unitranche financing creates an opportunity for SMEs to act faster and perform more competitively.
Reduction of Costs
Not only can unitranche financing simplify the loan process, but it can also significantly reduce the price of it. Because the borrower only deals with one lender, the legal and administrative costs of facilitating the deal are drastically lower than when dealing with multiple lenders. Only negotiating with one party also makes it easier to comply with the terms of the loan, and it reduces the overall labor required to manage it. From the reduced costs and streamlined maintenance, the decision-making process for a business becomes smoother and more straightforward.
Paying a single blended interest rate is also less difficult to juggle and could potentially save capital spent on interest in the long run. This does not necessarily mean that it is the right fit for all borrowers looking for multiple avenues of financing, as diversifying funding could also benefit your capital structure depending on the timeline of your business objectives and the terms of each loan. Therefore, it is important to weigh the impact of both possibilities when searching for the right financing solution.
LQD Finance’s Approach to Unitranche
LQD Business Finance adopted unitranche financing into a wide index of options available to deliver efficient and transparent solutions to the middle market. Flexibility, as embodied in the unitranche structure, is integral to our lending approach. Rather than restricting borrowers to a credit box, LQD Finance utilizes state-of-the-art technology to automate the approval and underwriting process to provide faster and more comprehensive funding than traditional lenders. If you think unitranche financing might be the answer you have been looking for, connect with one of our specialists today to get started.
- Blog