What is an SPV?
An SPV, or special purpose vehicle, is a legal entity that is created for a single financial purpose. Investors and/or companies create SPVs to fund investments, isolate financial risks, or set up the securitization of assets. When it comes to accounting, tax, and bankruptcy purposes, SPVs are separate from the individuals or companies that form them. SPVs are passive entities; they neither conduct business nor hire employees.
Here, we'll focus on SPVs in the context of debt capital and structured finance. When fintechs, proptechs, and other high-growth companies raise debt capital in asset-based financing arrangements, their capital providers want to separate the assets or portfolio of the company (which are typically some sort of receivable) from the company itself. That way, even if something happens to the borrower, the capital provider can protect its investment and still have access to the underlying assets.
That's where SPVs come in. In the debt capital context, SPVs are "bankruptcy remote," meaning that the assets held by the SPV are not affected by, for example, the bankruptcy or insolvency of the company that created the SPV. Debt capital SPVs are created specifically to hold or purchase the assets of the borrower.
When do fintechs need to set up SPVs?
The formation, administration, and monitoring of SPVs is an integral part of asset-based lending. Fintechs often need to work with their legal counsel to set up SPVs when they want to raise capital backed by a portfolio of cash flow-generating assets.
Take consumer lending, BNPL, or credit card fintechs, for example. When these companies raise debt capital, they must form SPVs and transfer cashflow-generating assets to that SPV. That typically means creating a new bank account (for collections) governed by a deposit account control agreement (DACA) and held in the name of the SPV. With this structure in place, capital providers (i.e., lenders) can have both structural and functional safeguards in place for risk mitigation.
But setting up the SPV is just the beginning. After a debt raise, fintechs need to monitor and report on the assets held by the SPV on a regular basis. For example, the balance of the SPV-administered bank/collections account is an input in regular borrowing base reports and draw request submissions.
By leveraging technology designed to track and manage the receivables and cash administered by SPVs, fintechs can save dozens to hundreds of man-hours a month and ensure compliance throughout their debt capital lifecycle, especially as they diversify their sources of funding (e.g., expand to a second or third credit facility) and require different reports and safeguards for different segments of their portfolio.
Want to learn more?
SPV management is just one of the many operational and financial hurdles required to successfully raise and manage debt capital. If you're interested in learning more about software that can help you streamline your debt capital operations, just request a demo of Finley. We'd love to chat!