Senior + Junior... Or, One Unitranche Facility?

For most commercial lenders, raising capital has traditionally meant assembling several financing options into a workable capital stack.

A commercial finance platform owner may find a bank to provide a senior lender finance facility to allow for scalability. As the portfolio grows, the owner/operator may eventually reach the maximum permitted under the bank’s senior credit facility. That limit may be driven by the borrowing-base structure, the total facility commitment, the amount of equity supporting the platform, or a combination of those factors.

When the platform reaches a constraint under the bank line and can no longer grow its portfolio, the owner generally seeks additional debt that is subordinated, or junior, to the bank. Once the bank approves that junior capital and the parties enter into an appropriate subordination agreement, the bank will generally allow the qualifying subordinated debt to be treated as equity or additional capital for purposes of its financial covenant calculations. In other cases, raising additional outside equity may be another alternative for growing the capital base.

To put the story above into real numbers, consider a lender with $2.5 million of equity. If the senior lender permits leverage of four times equity, the lender can borrow up to $10 million, providing total lending capacity of approximately $12.5 million, subject to the borrowing base and other facility requirements.

Once the portfolio reaches that capacity, continued growth may require additional availability under the senior facility, qualifying subordinated debt, additional equity, participations, or a different financing structure.

For years, those have been the traditional choices.

But could there be another option? Instead of adding another layer of capital, and the resulting complexity and administrative burden, what if a single facility could provide the leverage needed to support continued growth? Into this complex set of circumstances enters a largely overlooked structure: the unitranche facility.

At Haversine Funding, we work exclusively with factoring companies, asset-based lenders, equipment finance companies, purchase order finance firms, bridge lenders and other commercial specialty finance platforms to help them identify the most effective way to finance growth. While many lenders know us for senior lender finance facilities, junior capital and participation programs, the unitranche facility is becoming increasingly relevant for many platforms.

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With So Many Options, What Is a Financial Platform Leader to Do?

‍First, see the whole board. When evaluating any financing structure, don't begin (and end) by asking, "What's the lowest interest rate?"  

Instead, ask yourself this: "What's the most efficient capital structure for the next stage of growth?"

For example, let’s return to the lender above again:

• $2.5 million of equity, plus  
• $10.0 million senior bank lender finance facility
• Total lending capacity of $12.5 million

Let’s further assume that business is strong and demand within the portfolio grows to $15 million. With the existing structure, how does the lender satisfy that demand?

• Raising additional equity.
• Adding a junior lender behind the senior facility.
• Increasing the senior commitment, if the borrowing base/leverage support it.
• Using participations for particular credits or concentrations.

With junior capital, the subordinated debt can fund part of the additional need directly. Because properly subordinated debt can also be included as additional capital for purposes of the bank’s leverage calculation, it may support further senior borrowings if the facility commitment and borrowing base permit them.

Under a higher-advance unitranche facility, that same growth might instead be accommodated within one financing structure, depending on the capital provider’s underwriting criteria.

Each option carries a cost. The goal should not be simply to minimize today’s top-line borrowing rate. The goal is to choose the structure that best supports long-term growth while maintaining operational flexibility at a reasonable cost of funds.

‍What Is a Unitranche Facility?

Traditionally, a unitranche loan combines what would otherwise be separate senior and subordinated debt into a single borrower-facing credit facility with one set of documents and one blended borrowing cost.

While unitranche financing is commonly associated with private equity acquisitions and corporate lending, the same concept can be applied to commercial lender finance.

Rather than assembling multiple financing partners, a senior lender and one or more subordinated lenders, a commercial lender may obtain one higher-advance facility designed to provide the additional leverage needed to grow without immediately raising outside equity or negotiating a separate subordinated facility.

The capital behind a unitranche may come from one provider or from multiple providers working together. From the borrower’s perspective, however, it generally operates as one facility with one primary financing relationship, one borrowing-base and reporting process, and one covenant package.

Depending on the lender, collateral and structure, a unitranche may provide higher advance rates than traditional senior facilities, in some cases approaching 95% of the eligible borrowing base.

‍Is It More Expensive? 

The answer is more nuanced, and we may have to do a little math here.

Comparing the face interest rate on a unitranche facility head-to-head against the top-line interest rate on a traditional senior bank line only captures part of the picture. For a meaningful cost comparison, a unitranche facility must be compared against the complete capital stack it could replace:

• Senior lender finance facility
• Junior lender finance facility
• Additional equity, if required

For illustration, assume SOFR is approximately 3.7%, near its level at the time of this article. A senior bank lender finance facility might carry an all-in borrowing cost in the 7% to 9% range, while subordinated debt may be priced at 15% or higher.

The ultimate blended cost depends on the relative amounts provided by the senior and junior facilities. Although a senior lender may offer an attractive stated advance rate, eligibility exclusions, concentration limits, reserves, leverage requirements and other borrowing-base provisions can reduce the facility’s effective or net advance considerably, in some cases to approximately 65% to 80% of the portfolio.

If junior capital must fund a meaningful portion of the remaining requirement, the blended borrowing cost may range from approximately 9% into the low teens, although actual pricing varies considerably based on the portfolio, leverage, structure and market conditions.

Now compare that complete capital stack to a single higher-advance facility. Even if the unitranche has a higher stated rate than the senior bank facility, the overall economics may be competitive after considering legal expenses, duplicate diligence, subordination negotiations, multiple facility fees, ongoing administration and the potential cost of raising additional equity.

This analysis should also recognize that a unitranche rate generally applies to the entire outstanding balance, while a traditional senior-plus-junior structure preserves the lower senior rate on a portion of the debt. Depending on the amounts involved, either structure could produce a lower total cost.

The comparison also does not fully capture the economic cost of ownership dilution, decision-making concessions or the long-term value transferred to new equity investors.

The objective is not simply minimizing today’s borrowing rate. It is optimizing access to capital while preserving the flexibility to continue growing tomorrow.

For many growing commercial lenders, the simplicity of a unitranche structure has value beyond the stated interest rate. It is also important to consider where the business may be two years from now and whether the financing partner has the ability and desire to grow with it.

Capital structures are often evaluated using one set of assumptions. In practice, lenders should run multiple scenarios and compare the maximum usable availability, leverage and covenant requirements, total cost, operational burden and remaining growth capacity under each alternative.

Execution risk matters as well. Every additional financing relationship introduces another underwriting process, legal review and decision-maker whose approval may be required when circumstances change. A single borrower-facing facility can reduce that complexity, improve responsiveness and potentially save expenses associated with coordinating multiple financing parties.

‍When Does a Unitranche Structure Make Sense?

Every lender is different, but a unitranche approach may be worth considering when a commercial finance company:

• Is growing faster than retained earnings can support.
• Would otherwise require both senior and junior capital.
• Wants to simplify its capital structure.
• Values speed, certainty and execution.
• Prefers working with one financing partner.
• Wants to maximize borrowing availability without immediately raising additional equity.

Conversely, a well-capitalized lender with ample equity sources and sufficient senior financing may find that a traditional lender finance facility remains the most cost-effective solution. A senior-plus-junior structure may also be the better alternative when the lender has a strong bank relationship and benefits from retaining lower senior pricing on a significant portion of its debt.

There is no one-size-fits-all answer. The right capital structure depends on the lender’s business model, portfolio characteristics, growth objectives and long-term strategy.

At Haversine Funding, we do not believe every commercial lender should have the same financing solution. Some financing platforms benefit most from a traditional senior lender finance facility. Others simply need a junior facility behind an existing bank partner. Many use participation programs to manage concentrations, preserve client relationships or increase lending capacity. For select situations, a unitranche facility may offer the best combination of borrowing availability, flexibility and simplicity.

Unlike many capital providers that specialize in only one product, Haversine can evaluate multiple capital structures and help determine which approach best aligns with a lender’s objectives. Sometimes that is a senior facility. Sometimes it is junior capital. Sometimes it is a participation strategy. Sometimes the most efficient solution is a unitranche structure. And sometimes it may be equity, which Haversine provides selectively through the Haversine│Vector program.

The first conversation is not about selling a financing product. It is about understanding where the platform is today, where it wants to be tomorrow, and running the different scenarios to determine which combination of availability, leverage, cost and flexibility provides the right pieces for its particular puzzle.

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