Specialty Finance: Choosing a Financing Approach

If your assets do not fit a recognised consumer or commercial category, the instinct is to lead with your industry. Lead with the payment right instead. A provider will underwrite your industry and its systemic exposures as well, but that analysis only becomes possible once they can see precisely what obligation they would be financing, who owes it and what has to happen before it pays.

Describe the payment right, not the industry

Four questions do most of the work. Answer them precisely before you approach anyone.

• Who owes the money, and on what basis? Name the obligor and the instrument creating the obligation. A contract, a statute, a court order and a commercial custom are not equivalent, and the difference determines what can be financed.

• Where does the cash to pay actually come from? Trace the payment back to its economic source. If the obligor pays out of revenue that depends on something happening in future, the financing is exposed to that something, whatever the contract says.

• What has to happen before payment is due? List every contingency: delivery, performance, verification, a third-party decision, the passage of time. Each contingency is a place where the cash flow can stop.

• What reduces the amount actually received? Disputes, adjustments, offsets, rejections and discounts all shrink collections without any obligor defaulting. This is dilution, and it is frequently the dominant risk in specialty receivables while attracting the least attention in pitch materials.

Work through those four answers and you will usually find that the label attached to your industry was hiding the actual analysis.

Four mappings and what changes in each

The following are mapping examples showing how the same four questions produce different answers. They illustrate analytical structure. They are not statements that financing is available for any of these on any particular terms.

Notice what varies. Royalty payments depend on commercial performance that has not happened yet, so history by payer carries most of the analytical weight; how forward projections are treated depends on the quality of that history and on the structure, and haircuts vary rather than following a standard rule. Litigation-related claims turn on the outcome of a legal process, which is not always binary: partial recoveries, settlements below claimed amounts, adverse cost exposure and long or uncertain timing all sit between filing and cash, and assessing them requires case-specific specialist judgement a generalist credit team cannot supply. Healthcare receivables are usually analysed around payer behaviour, where the amount received routinely differs from the amount billed and some claims are denied outright, so dilution measurement is the central task and eventual payment is not assured. Contracted energy receivables shift attention onto counterparty credit and onto whether the project can actually deliver.

Existing receivables versus future performance

A useful distinction, though not a hard boundary, runs between borrowing against payment obligations that already exist and funding an enterprise or project that must perform before any obligation arises.

Borrowing against existing receivables is the most recognisable structural work. There is a defined pool, an obligor set, historic collection data and an advance rate applied to eligible balances. The provider is taking obligor credit, dilution and operational risk, and the structure has a natural sizing mechanism through the borrowing base.

Asset-backed finance is not limited to receivables already on your books. Future flow structures, royalty securitisations and financings of contracted cash flows all fund amounts that will arise later, and they can work where the underlying contracts, historic performance and legal position support them. What changes is what the provider is underwriting: less obligor credit on an existing invoice, more the durability of a contract and the reliability of the activity generating payments under it. Those structures are more specialised, take longer, and depend heavily on the specific documents.

At the far end sits funding for performance that depends on your business succeeding at something it has not yet done. There is no contractual payment obligation to advance against at all, and the exposure is business or project execution risk.

Many businesses hold both existing and future exposures. Splitting them and financing each appropriately usually beats seeking one facility that covers everything, because the pooled request gets assessed against its weakest component.

The evidence that makes a specialist engage

Specialty assets require underwriters willing to learn something specific, and that costs the provider real time. Your job is to reduce the cost of learning.

The historic collections and dilution items carry the most weight. Projections of what should be collected are weak evidence for an unfamiliar payment right. What has actually been collected, against what was billed, over enough periods to show a pattern, is the comparison that gets tested. Produce it before you start conversations rather than during them, because it is among the first things requested in diligence.

Be ready to establish the following for a buyer of an unfamiliar payment right: independent diligence rather than reliance on your analysis, access to the underlying information, and documented terms of transfer, servicing and recourse.

Be similarly explicit about who does the work. Where billing, collection and dispute management sit with different parties, document the division in writing. Responsibility that nobody has recorded tends to become responsibility that nobody performs, and the servicing requirements guide sets out how those obligations are usually allocated in facility documents.

When corporate or project funding fits better

Where the risk sits mostly in future business performance, the question is which instrument prices that risk, not whether financing exists.

If your payment rights arise only after substantial future performance by your own business, a receivables borrowing base has little to advance against, though a specialist structured financing built around the underlying contracts may still be possible. If your obligor set is a single counterparty whose credit is effectively the whole exposure, a provider is lending to that counterparty in substance and will structure on that basis. If the contingencies before payment require specialist judgement in a discipline the provider does not staff, they will need to commission that assessment or decline, and the cost and time involved are worth establishing early.

Corporate borrowing against your business, project financing structured around a specific asset and its contracts, equity, or a specialist structured financing may each fit better than a conventional receivables facility. Choosing on the basis of what is actually being underwritten, rather than on which label sounds more attractive, tends to shorten the process. Which providers operate in which mode is covered in the capital landscape material.

Testing fit before you spend on diligence

Run a short structured test before committing to a process. Write the four payment-right answers on one page. Assemble the collections and dilution history. Identify which contingencies require specialist assessment and whether the provider you are approaching has that capability in house. Then ask directly what proportion of your described pool would be eligible under their criteria, what would be excluded and why, and what specialist input they would need to commission.

Those answers are worth more than an expression of interest. A provider who can name the exclusions and the specialist input required is engaging with the actual asset, and even a decline on that basis tells you what to fix. Where the response is encouraging, the diligence process and term sheet material set out what follows.