Is It Time For A Stretch Loan For Your Business

Senior stretch loans are one of the most flexible types of financing available. They are flexible because they combine an asset-based loan with a cash-flow based loan. Companies use senior stretch loans because they have a need for a higher injection of capital for which their assets or cash-flow alone won’t qualify them. In order to qualify for a senior stretch loan a company must prove that they have a combination of assets and cash flow which offers an acceptable level of risk for the lender to service the loan.

What is a Senior Stretch Loan?

A senior stretch loan, also known as an overadvance is a “loans to business enterprise that has elements of both asset-based and cash-flow lending,” (Investopedia Inc. 2000). Asset based lending uses a company’s fixed assets as collateral. Fixed assets are a companies’ real or personal property which can be seized if the lendee defaults on the loan. Cash-flow lending uses proof of the positive flow of capital to a business to qualify for the loan. Cash flow is the flow of money within a business. The most important aspect of cash flow for securing a loan is the profit margin. In order to get a cash-flow based loan a company must meet stringent guidelines to prove to the lender the loan will be repaid. A senior stretch loan is a loan using the companies’ existing assets, as well as its expected cash flow as collateral for the loan. It is used when a company doesn’t have the assets to cover the loan, but makes a solid case based on its projected cash flow that it will be able to pay back the loan. Senior stretch loans amortize the higher risk cash-flow based portion of the loan quickly within the first or second year to minimize risk to the lender of default, (Gertzof 1999-2000). This minimizes the amount of time a company has more debt than it has leverage.

Why Would a Company Use a Senior Stretch Loan?

When a company needs more capital than it has assets to finance, a senior stretch loan comes is often the best option. Senior stretch loans offer “more capital up-front than cash-flow or asset-based only loans,” (Bank of America Inc. 2012). This is because a senior stretch loan “rewards companies with strong balance sheets” with “a lower financing cost than straight-cash flow loans,” (Investopedia Inc. 2000). It is used when a company has solid cash flow but little assets, or has a large amount of assets but not enough to meet its needs for leverage alone. Senior stretch loans are taken out instead of simple cash flow based loans because “loan structures that are supported by assets, even on a stretch basis, will receive more flexibility, better pricing, and have a greater chance of getting done,” (Gertzof 1999-2000) than simple cash flow based loans. It is this flexibility that makes senior stretch loans an attractive option.

Who Qualified for a Senior Stretch Loan?

Companies that have a desire for capital that is greater than the total leveraged value of their current assets, and have solid projections for future cash flow, if they get a the injection of capital, are in best position to take out a senior stretch loan. The advantage of the combination of the flexible asset portion of the loan, and the quickly amortized cash based loan offer an attractive option to corporate borrowers but they have to pass stringent qualifications to take out a loan that is greater than their current assets. The way a borrower qualifies for the loan is through showing either a “high operational cash flows or a strong balance sheet consisting of a generous asset base,” (Bank of America Inc. 2012). The senior stretch loan is one of the most flexible loan types because it can be modified based on individual companies’ financial needs and strength. Whether asset or cash flow rich, many companies are able to qualify for a senior stretch loan.

Conclusion

The flexibility of the senior stretch loans makes it one of the most attractive types of financing available. The combination of an asset-based loan with a cash-flow based loan is what makes the senior stretch loan possible. Companies that need a higher injection of capital than what their assets or cash-flow alone would qualify for are in the best position to take out a senior stretch loan. A company must prove to a lender that they have the right combination of assets and cash flow, which offers an acceptable level of risk in order to qualify for a senior stretch loan. Senior stretch loans offer an excellent way to leverage companies’ strong suits, whether they are asset, or cash flow based.

Works Cited

Gertzof, Mark. "The Changing Face of Asset-based Lending." HeinOnline -- 15 Com. Lending Rev. 52, 1999-2000: 52-55.

Investopedia Inc. Senior Stretch Loan. 2000. http://www.answers.com/topic/senior-stretch-loan?cat=biz-fin (accessed May 1, 2013).