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Integrity Financial Groups, Inc. > Financial Education > What Are The Benefits Of Structured Finance?

Who Uses Structured Finance?

Research and Development Projects. Companies spend billions of dollars on R&D to produce their projects first.

$42.7 billion of research and development costs later, Amazon was granted 2,244 new patents in 2020. Their patents included advancements in artificial intelligence, machine learning, and cloud computing.

  • Amazon: $42.7 billion
  • Alphabet, Inc.: $27.6 billion
  • Huawei: $22.0 billion
  • Microsoft: $19.3 billion
  • Apple: $18.8 billion
  • Samsung: $18.8 billion
  • Facebook: $18.5 billion

Research and development activities focus on the innovation of new products or services in a company. You can get funding based on future revenues rather than past performance.

Understanding Structured Finance

Structured Finance: What Are The Benefits Of Structured Finance?

Structured finance is a financial instrument available to companies with complex financing needs, which cannot be ordinarily solved with conventional financing. Traditional lenders do not generally offer structured financing. Structured finance products, such as collateralized debt obligations, are non-transferable. Structured finance is being used to manage risk and develop financial markets for complex emerging markets. The name “structured” is explained by the fact that these financial transactions are composed of collateral-backed securities; think of asset-backed securities and mortgage-backed securities. Structured Finance is a complex form of financing, usually used on a scale too large for an ordinary loan or bond. Collateralized debt obligations, syndicated loans, and Mortgage-Backed Securities – the C4 behind the 2008 financial crisis – are all examples of Structured Finance.

Why Do Clients Use Structured Finance Products?

They offer a wider set of investment opportunities than any other type of investment. And, they can be used for practical purposes such as adding diversification to an investment portfolio, hedging currency risk and even helping to manage cash flows.

Structured finance products are created through a securitization process, in which financial assets such as loans and mortgages are packaged into interest-bearing securities backed by those assets, and issued to investors. This, in effect, re-allocates the risks and return potential involved in the underlying debt. Structured deposits, guaranteed capital, and capital at-risk are the three categories of structured products. A threshold question is how securitization and structured finance differ since the terms are often used interchangeably. In practice, most references to structured finance mean securitization. Structured finance can refer more broadly, however, to any transaction that utilizes special-purpose vehicles. Structured products aspire to provide investors with highly targeted investments tied to their specific risk profiles, return requirements, and market expectations. Benefits of structured products may include: Principal protection, as above (depending on the type of structured product)

Structured finance instruments comprise a range of products designed to repackage and redistribute risk. They are pre-packaged investments based on a single security, a basket of securities, options, commodities, debt issuance or foreign currencies, and to a lesser extent, derivatives. Project finance is the structured financing of a specific economic entity – a Special Purpose Vehicle (SPV) – created by the sponsors using equity or debt.

The lender considers the cash flow generated from this entity as the major source of loan reimbursement. Capital Structure is a combination of different types of long-term sources of funds. Financial Structure is a combination of different types of long-term as well as short-term sources of funds. The Capital Structure is a part of the Liabilities section of the Balance Sheet.

The future of structured finance products is expected to grow in scope and provides the opportunity to earn enhanced returns on a risk-adjusted basis. In summary, structured financial products are positioned to offer investors wide exposure to alternative types of investment options. Structural Models. Structural models focus on a firm’s assets and liabilities and define a mechanism for default. The probability of default is endogenous as default normally occurs when the value of the firm’s assets hits a barrier representing default. In building the financial structure of a company, financial managers can choose between either debt or equity. Investor demand for both classes of capital can heavily influence a company’s financial structure.

Structured finance for projects and developments is a loan “structure” that relies primarily on the project’s cash flow for repayment, with the project’s assets, rights, and interests held as secondary collateral. Project finance is especially attractive to the private sector because companies can fund major projects off-balance sheet (OBS). Structured Financing helps clients make an accurate estimation of the different components used during the structure of the funding of the development of their project, thereby resulting in cost savings. It also aids in getting a clear perception of both current funding needs and futural structural financing views.

What Are The Pros And Cons Of Structured Finance?

The pros, to these finance options, are to borrow funds by using their collections (cash flow) as security rather than using their physical assets as collateral. The benefit of structured financing is that the entity can use its liquid assets derived from its illiquid infrastructure as an alternative funding source may be the ability to package both good and bad loans together and garner higher rewards for riskier investments.

Cons include increased risk and the ability for the obligations to be worthless, especially during economic downturns.

Structured finance is typically indicated for borrowers with highly specified needs that a simple loan or another conventional financial instrument will not satisfy. In most cases, structured finance involves one or several discretionary transactions to be completed; as a result, evolved and often risky instruments must be implemented.

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    About the author

    Dallin Hawkins brings over two decades of expertise within the finance sector, holding executive positions and distinguished as a top performer since 2003. Throughout his tenure, he has orchestrated and structured in excess of $60 billion in volume across diverse industries, including renewable energy, construction, transportation, manufacturing, mining, drilling, and oil and gas sectors. His adept negotiation skills and profound industry acumen have facilitated the successful management and funding of numerous intricate transactions. Leveraging foundational financing principles, Dallin consistently engineers structured and holistic funding solutions. His proficiency spans financial structuring, information technology, marketing, networking, and sales, underpinning his capacity to navigate multifaceted challenges with finesse. Moreover, Dallin's leadership extends beyond transactions, having personally mentored and overseen the development of countless sales executives. His guidance encompasses deal negotiation strategies, adept management of client expectations, and effective time management techniques tailored to the nuances of the finance domain. Notably, Dallin's recent financial venture stands poised to redefine and fortify the financial landscape through unparalleled growth trajectories.

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