Senior Stretch Loan, or overadvance loan, is a hybrid debt instrument consisting of both asset-based loan and cash flow loan. It is a loan to a business enterprise that has elements of both asset-based and cash-flow lending. In a typical stretch loan the lender offers funding beyond the lendable value of current and fixed assets if the company demonstrates it can generate sufficient cash from normal business operations to repay the loan. These loans reward companies with strong balance sheets and have a lower financing cost than a straight cash-flow loan.Such loans are suitable for two types of companies:
- Companies that have substantial asset base but don’t have stable or predictable cash flows. For example, troubled or turnaround companies. Cash flow loans would be much smaller and more expensive for these companies.
- Companies with healthy cash flows but lower assets. In this case, a pure asset-based loan would be insufficient.
For both types, the senior stretch debt structure takes advantage of the combination of the company’s assets and cash flow to make significantly more debt available than would have been otherwise.