THE ADVANTAGES OF STRUCTURED FINANCE
The advantages of Structured finance is a type of debt-based capital structure, that is used to offer investors a higher level of security. Structured finance works by combining debt and other financial instruments to create a new financial product. However, the advantages of structured finance and it’s product, can be used in Financing major companies, and it’s large-scale commercial real estate investments. Structured finance has become another way of raising capital because it creates flexibility and higher potential returns than other traditional forms of financing.
Structured financing is divide into different categories including the following,
- Asset-backed securities (ABS).
- Mortgage-backed securities (MBS).
- Collateralized debt obligation(CBO).
- Synthetic investments and derivatives.
- Structured investment vehicles (SIVs)
Each of the above-structured finance products has its unique features, benefits, and risks. Both individuals and institutions must understand these differences, for them to make an informed investment decision.
BENEFITS OF STRUCTURED FINANCE.
This is a kind of lending that involves the structuring of cash flows, from repackaging and securitization of assets. It is designed to manage and improve a companys debt position, hence enabling them to access more capital for a variety of projects. Structured finance is beneficial to businesses in a variety of forms or situations thereby reducing the cost of capital and also helping to channel their financial portfolios
KEY ADVANTAGES
• Reduced Cost of Capital:
Structured finance enables businesses to be able to access capital at a much lower cost than traditional lending. However, the assets used to back the loans are typically higher in quality and much reduced in risk.
• Flexibility:
Structured finance can be tailored or customized to match the needs of each business. However, it enables the company to make use of the assets they have to access the capital they need or want.
• Diversification of financing:
Structured finance can be used to diversify business financial portfolios, which allows them to have means of other ways to access different forms of loans.
Learn More: HOW TO SECURE A PERSONAL LOAN
RISK MITIGATION
Structured finance can be useful to businesses in terms of risk mitigation. Through the use of scrutinization, a business can be able to transfer the risk of the assets to another party. However, by allowing them to focus on the long-term objective of the project. Structured finance has other uses in that it can be used to reduce interest rate risk. This is because, the rate of the loan is fixed hence enabling businesses to be able to access capital at a lower cost.
DRAWBACKS OF The Advantage Of Structured Finance
Structured finance is a great way to do business and raise funds, but it has its drawbacks. Though it has a lot of potential benefits, it also has its drawbacks that should be put into consideration before making use of it.
Complicated structures:
One of its drawbacks is its complicated nature or structure. Structuring finance will require intricate analysis of multiple components such as tax, legal accounting, and economic factors. This is extremely time-consuming and very complex to understand. Mostly if the person doing the structuring doesn’t know it very well.
Difficulty of liquidation
Another drawback is structural finance is the difficulty of liquidation of the asset transaction. Therefore the process of liquidation is somewhat difficult and time-consuming.
The Advantages And Disadvantages Of Structured Financing
Structured financing is used in a variety of ways, and it has many potential benefits. But it has some possible risks and trade-offs, that might make you not embark on the strategy. Therefore understanding the advantages and the disadvantages will make you know what you are involving yourself to.
Pros
• Structured finance can make you diversify investment portfolios, while you are mitigating risks. When you utilize the combination of debt securities and derivative, instruments does help you make returns in different kinds of environments
• With structured finance, you don’t have to rely strictly on the type of asset class of growth. This is because it gives you exposure to multiple access classes for mitigating risks and creating high returns.
• Structured finance helps you to generate target returns. When you create structured financial instruments with customized features, you will possibly create a product that meets specific return objectives.
Cons
• Structured finance transaction involves complex documents, transactions, and legal language. When you don’t have a comprehensive understanding of the terms and conditions and their associated risks, you will become exposed to what you have not bargained for.
• Structured finance involves leverage, which can amplify your gains and losses than you expected. Because of this, it is important to employ protection, in structured financial transactions.
• Structured finance is more expensive to maintain or run than other straightforward businesses or investments. And hence reduces potential returns.
WHAT IS STRUCTURAL FINANCE?
Structural finance is a a form of financial engineering, that involves the pooling of specialized debts and equity assets. However, which includes public and private funds, to facilitate the use of capital for a particular project or business. Structural finance creates a structural financial model that is tailored to the needs of a particular business or project in a corporate debt restructuring or a development of customized assets-backed security.
USES OF STRUCTURAL FINANCE
Structural finance is used primarily to minimize financing costs and the management of risks that are associated with the development of businesses or projects. Structural finance also helps to bridge the gap between limited available funds and large capital structural needs. It is also used as a substitute for traditional banking finance, venture capital, or the leveraging of buyouts when they are not available
TYPES OF STRUCTURAL FINANCE
There are two categories of the advantages of structured finance. They are, asset-backed security (ABS) and Collateralized debt obligations. They are backed by a portfolio of debt or equity, and these can be used to finance projects like buyouts and housing development. While CDOs are pools of debt obligation, they are mostly backed by pools of corporate debt, mortgages, and other assets to provide capital entity.
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