What is unitranche financing and how can it help my business?

2-minute read

Unitranche is a flexible form of financing often used by mid-sized companies to help fund acquisitions or ownership transitions. It combines different types of secured and unsecured debt in a single loan with a blended interest rate and a predictable repayment schedule that gives a business maximum flexibility.

Traditionally, acquisition financing involves multiple loans from various lenders, including both senior and subordinate debt. Each loan operates separately, with its own credit agreement, security and covenants. With unitranche financing, these complex structures are simplified and everything is blended together into a single loan from a single financial institution.

You can, for example, imagine a business transition where the loan to purchase the business is in part secured by equipment and in part backed by the company’s cash flow. Instead of creating two separate term sheets from one or two lenders (one secured by the equipment and the other based on the business’s cash flow), unitranche creates a single blended loan with a weighted average pricing.

What are the benefits of unitranche financing?

There are three main benefits to unitranche financing:

1. Certainty and efficiency of closure

Negotiating a single loan agreement with one counterparty makes it easier to ensure closing. This can be particularly valuable in an acquisition scenario where exclusivity periods often create tight timelines.

2. Simple structure with flexible repayment terms

There is only one set of financial covenants to analyze and think through, which simplifies negotiations with the lender. In addition, the repayment structure can be adapted to your business’s unique cash flow profile.

3. Reduced costs

Lastly, having a single debt instrument reduces the number of legal documents, including intercreditor agreements that would otherwise be required.

Consider the impact on your capital structure

Before moving forward with unitranche financing, a company should consider the impact on its capital structure as a whole. In certain cases, a company may decide to do without the simplicity of a single loan if it sees a benefit to diversifying its funding sources across multiple lenders.

A simplified structure when timelines are tight

While unitranche may not be the right fit for every company in every scenario, it is always helpful to be aware of the financing options available. In an acquisition or ownership transition scenario, a unitranche structure can provide a simplified structure, and most importantly, certainty of closure when working with tight timelines.

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