What Is Structured Finance and How Does It Reduce Financial Risk?

TL;DR: Structured finance leverages asset-backed securities and tailored instruments to unlock liquidity, spread exposure, and reduce risk for both companies and investors.

Structured Financing:

• Converts illiquid assets into predictable cash flows through securitization.
• Transfers risk to investors with higher risk tolerance.
• Diversifies exposure across asset pools, reducing vulnerability to market shifts.
• Provides customized debt and equity structures aligned with growth strategies.
• Offers alternatives to traditional corporate finance methods.

Structured finance is a set of advanced funding techniques that allow companies and investors to manage capital more efficiently. At the same time, it helps individuals and organizations reduce their exposure to risk.

Structured finance is different than most traditional loans or equity raises. Uniquely, it leverages asset-backed securities and other complex instruments to unlock liquidity. Structured financing can help improve balance sheet flexibility and spread risk across multiple parties.

In this guide, we’ll explain the basics of structured finance and answer your top questions.

How Does Structured Finance Work?

Structured finance typically involves pooling financial assets and converting them into securities. Those securities can then be sold to investors. These instruments create predictable cash flows while diversifying risk.

A classic example of structured debt financing is mortgage-backed securities. By bundling mortgages into tradeable securities, lenders reduce their own exposure. Meanwhile, investors gain access to steady income streams.

In a similar vein, structured equity financing allows businesses to raise capital in customized ways. Such methods balance dilution and risk-sharing between investors and founders.

What Are Examples of Structured Financing?

Examples of structured finance services include:

• Asset-backed securities (ABS)
• Mortgage-backed securities (MBS)
• Collateralized debt obligations (CDOs)
• Structured notes and derivatives
• Hybrid structures combining debt and equity

The right choice for you will depend upon your unique funding challenge. This customized approach is what sets structured finance services apart from traditional lending.

How Does Structured Finance Reduce Risk?

Instead of relying on a single lender or funding source, structured transactions spread exposure out.

In essence, structured finance acts as a safety mechanism for both borrowers and investors. The companies benefit from liquidity and stability without over-leveraging. The investors benefit from reliable income streams backed by tangible assets.

Specifically, here are some ways structured finance reduces risks for both parties:

• Asset securitization. By converting assets into tradable securities, businesses turn illiquid holdings into predictable cash flows. At the same time, they offload any associated credit.
• Risk transfer. By transferring exposure to investors with higher risk tolerance, companies can unlock capital while maintaining balance sheet strength.
• Market insulation. Structured products are often backed by diversified pools of assets. That makes them less vulnerable to the performance of any single market segment.
• Flexible capital design. Through structured debt financing and structured equity financing, companies can align risk-sharing with long-term growth strategies.

What Is the Difference Between Corporate Finance and Structured Finance?

Corporate finance deals with conventional funding methods. Examples include loans, bonds, and equity offerings.

Structured financing tailors funding solutions to unique needs. It accomplishes this by breaking down assets into smaller components and redistributing risk.

Ready to Put Structured Finance to Work?

Structured financing plays a crucial role in modern capital markets. It enables growth strategies that would not be possible with conventional funding methods. Consider trying a new capital facilitation pathway to mitigate risk.

Get started with our managed buy-sell program today.