Senior Stretch Loan
A senior stretch (or over advance) facility is a hybrid financing solution that falls between an asset-based loan and a cash flow loan. In this scenario, a lender structures the loan with elements of both asset-based and cash flow facilities, offering availability beyond the value of current and fixed assets if the company can demonstrate sufficient cash flow. The senior stretch facility rewards companies with strong cash flow by providing a highly flexible structure that is generally priced lower than a pure cash flow loan.
Senior stretch facilities are especially well suited for companies in cyclical or seasonal industries. In these situations, a company’s ability to purchase inventory or take on additional work is often restricted to what they can finance based on their current assets. The only way these companies can grow is if they can significantly increase their inventory or workflow during peak periods. By incorporating the company’s cash flow into the loan structure, the owner can purchase a much larger inventory, increase revenues and pay back the uncollateralized portion of the loan quickly.
Since a senior stretch facility’s structure takes advantage of both asset-based and cash flow loans, they make significantly more debt available than would have been through a straight cash flow loan. A senior stretch facility is structured to provide more capital up front, with the uncollateralized cash flow portion repaid within two or three years.
Senior stretch products also enable a company to raise capital quickly, without adding equity participation through stock or warrants. Business owners often give up a portion of their equity in order to finance growth, but fail to recognize the long term cost of this practice.