How Stretched Senior Debt Works
This debt is one of the most flexible types of loans available to borrowers. For example, a business that needs funding through the loan may be very well-established in their industry and may therefore over the years have built up a great deal of assets as part of a portfolio.
They may only have a limited cashflow for all nature of reasons; perhaps because the money is tied up in another part of the business. Therefore, they may be able to use proof of a positive flow of capital [cash] into the business as part of the security for the loan. However, this alone is not enough as the risks are very high for the lender.
Whilst there are very strict criteria for the borrower to meet, proving future positive cashflow into their business and showing very clear profit margins to cover the debt, if there is not enough positive capital and they default on the loan, the lender can be hundreds of thousands of pounds out of pocket.
To reduce this risk to an acceptable level and only if the borrower has a sufficient asset base, the lender may include a clause in the agreement that uses part of their asset base as collateral for the loan, along with expected cashflow.