Acquiring the right funding to operate as a large business can become a complicated financial issue.
The challenge of big businesses obtaining loans and credit isn’t due to the availability of money. What banks and financial agencies need before they can grant corporations a line of credit is the right collateral. When you and I acquire debt, our loans won’t “drastically” hurt the economy if our debt isn’t paid.
A corporation, however, has such large sums of debt that its credit defaults can lead to market collapses, unemployment, or inflation. Protecting society from entities that can’t pay their debts calls for structured ways of lending. Structured finance covers the strategies, tools, and laws that limit the risks of credit defaults.
The Complications of Debt
Structuring, as it’s applied within the world of finance, deals with debt, how it’s acquired, the amount obtained, and the period that it’s paid back within. Restructuring, for example, happens when a corporation incurs a massive deficit due to debt that leads to an outside agency reorganizing the finances of that company—to eliminate its debts.
The balance between a business’s income and its debts is what has been restructured.
Structured finance gives financial professionals reusable processes that reduce the risks of lending out substantial sums of money. Structuring is not so much about qualifying an entity for a loan as much as it’s about ensuring that the right cashflow is in place to protect a loaner if its loanee can’t pay their debts.
Hedging the Risk of a Market Collapse
Structured finance also provides a hedge that protects the cash assets of financial agencies that lend money.
Since the entities that rely on structured finance can impact national economies, maintaining a cash flow regardless of the amount loaned is what establishes a hedge on the risks of toxic debt. Structured finance enables a lender to distribute risk over a variety of collateral assets instead of one. Mortgages are popular structured, collateral assets.
A big bank, as an example, gives a business 10-billion dollars as a loan, but a loaner’s money doesn’t just appear out of thin air. The bank, in our example, must ensure that their $10 billion is returnable. Using structured finance enables a loaner to lend out money without, in most cases, having to risk their own.