Why Your Business Should Invest in a Special Purpose Vehicle

SPV is a term that refers to Special Purpose Entities. It is a mechanism of securitizing a company’s property based assets. It has been used by corporations since the 1880s to mitigate their financial risks as they venture on new business transactions. Read on to discover why your company should invest in SPV.

How Does SPV Work?

When your company purchases a new property, its registration is in your business name. If you form an SPV and use it to buy the new property, the registration will be in the new business name. The two companies will work independently, and in case of crises in any of them, there will be no effect on the other. It is a smart move when venturing into a risky business deal or if your current business is in a complicated financial situation.

All Businesses can Create SPVs

Any business can form an SPV as long as you have a parent company. Private companies have used SPVs in the past to trade and finance assets ranging from industrial equipment to homes. Moreover, some governments have set up SPVs to establish a public-private partnership in expensive projects such as infrastructure revitalization. Creating SPV on your own is overwhelming, especially if you are not familiar with the financial terms. It would be best if you looked for assistance from special purpose vehicle experts and they can go into depth about their specific services.

How Can You Apply SPV in Your Business?

You can use Special Purpose Entities to achieve crucial business goals and targets. The following are some applications.

• To secure receivables such as loans. It is usually the primary reason why most businesses form SPEs. If you have a mortgage and create the SPV, it will separate your credit from other obligations. Therefore, you can receive monetary benefits from other stakeholders or debtors.

• To mitigate risk. If you plan to acquire a significant project and are not sure of its outcome, you can create an SPV to legally isolate yourself from risks involved in your new operations or project.

• To quickly transfer the non-transferable assets. The SPV Company will be the legal owner of such assets. Consequently, if you sell the SPV, you will have sold or transferred the asset.

• As investment protection. If you are not sure of a particular investment, you can use SPV to test the waters before embarking on a full investment. It is a good strategy you can apply to venture into risky markets such as the financial markets.

• To raise funds. You can use the SPV to create new deals and raise funds without acquiring more debt. This can be by acquiring sponsors for the SPV or equity from investors.

• Hold your company’s fundamental properties. You can create an SPE and transfer some of your business key properties. When you get to a point when the property’s sales are higher than your company’s capital gain, you will sell the SPE. This will enable you to pay tax only on the capital gains, which will be lesser than the one you would have paid if you sold the properties.

How Can SPV Benefit Your Business?

Creating an SPV will benefit your business in numerous ways. The following are some of them.

• It enables your business to access the capital markets easily.

• If you use your SPV to securitize loans, you will pay lesser interest rates on the securitized bonds than the ones you would have spent on your parent company bond.

• The assets you hold in your SPV will be secure and safe when your company undergoes a financial crisis. Ultimately, this will reduce your credit risks from stakeholders and investors.

• Your SPV credit rating will be good. Consequently, investors will find it reliable and can purchase the bonds.

• After establishing an SPV, the stockholders and investors in your original company will be undiluted.

• If you create an SPE in a tax haven territory, it will save your business from taxes.