Planning the Capital Structure with Alternative Lending

Alternative lending is no longer an exotic niche product for many borrowers, but an established building block in the capital stack. Platform financings, funds, insurers and other alternative lenders complement traditional banks, especially where volume, structure or speed create special requirements. Anyone who wants to use these solutions should not treat them on a case by case basis, but integrate them into their overall capital structure planning.

Positioning alternative lending in the capital stack

The first step is to place alternative lending clearly within the capital stack. In most cases, these financings sit between classic senior debt and equity. Depending on the product, the position can be closer to bank debt or closer to traditional subordinated capital. What matters is how ranking, security and the repayment path are defined in the documentation. In many transactions, alternative lending does not replace bank financing, but complements it. The bank provides a first ranking facility with a conservative leverage profile, while an alternative lender covers additional funding needs above that. Alternatively, an alternative lender may act as the sole provider and offer a structure that is internally split into senior and economically junior components. For the borrower, however, it still appears as a single financing. It is important to define this role from the outset. If alternative lending is seen only as a last resort when a bank cannot cover the entire volume, borrowers quickly end up in a reactive position. If it is considered from the beginning as a potential building block in the structure, funding mix, metrics and exit options can be designed much more deliberately.

Defining the roles of bank, alternative lending and equity

Once it is clear where alternative lending should sit in the capital stack, the next step is to define the roles of the participants. Banks typically contribute attractive pricing, long term relationships and experience with standard security structures. Alternative lenders contribute flexibility, higher leverage corridors and speed, but in return expect a higher coupon and a clearly defined risk profile. Equity ultimately carries the entrepreneurial risk and provides the foundation for all debt decisions. In a planned capital structure, these roles are consciously allocated. This may mean, for example, that the bank takes on the conservative core financing, while alternative lending is used in a targeted way for specific purposes such as acquisition bridges, capex reserves or growth programmes. Equity is deployed so that it provides sufficient buffers and alignment of interest, without being tied up more than necessary. Rather than focusing solely on maximum leverage, it is worth looking at the quality of the structure. A well balanced combination of bank debt, alternative lending and equity will often create more stability and room for manoeuvre than a highly stretched structure that only aims for the highest possible level of indebtedness on paper.

Scenarios and the life cycle of the financing

Capital structure planning with alternative lending is always about scenarios as well. The closing date alone is not enough. What matters is how structure and metrics develop over the life of the transaction and how entry, holding period and exit fit together. In real estate, this might be the path from acquisition through development to stabilised ownership. In the mid-market corporate space, it can be the trajectory from initial investment through ramp up to a normalised cash flow phase. A professional approach defines a target state for each phase. In early project phases, a higher share of alternative lending can be sensible in order to preserve equity and maintain flexibility. As stabilisation progresses, the structure can gradually be shifted towards a more bank centred set up. To achieve this, tenors, amortisation profiles and covenants must be designed in a way that allows a predictable transition. Scenarios help make this development tangible. What does the capital structure look like in the base case and in a conservative scenario with delays or lower cash flows. Which refinancing windows are realistic and how do different exit paths play out. Borrowers who answer these questions in advance can position alternative lending in a way that supports the capital structure instead of limiting future options.

Governance and reporting as a success factor

Planning a capital structure with alternative lending is therefore always also a matter of governance and reporting. Internal processes should be set up so that relevant metrics, project progress and deviations from plan are identified and addressed at an early stage. This requires close cooperation between financial planning, asset or project controlling and the financing team. Agreed metrics are not only calculated for reports to banks and alternative lenders but are also actively used for internal steering. This creates a shared understanding of risk positions and potential actions before situations become critical. Borrowers who build this level of professional governance can engage with alternative lenders on an equal footing. Structured reporting, transparent decision making and a clear handling of deviations from plan often make it possible to find constructive solutions even in challenging phases. Capital structure planning with alternative lending then becomes not a one way street, but a framework that can be actively shaped and that supports projects and companies through different market environments.