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November 18, 2019 / By Jared Cohen

Everything you Need to Know about Credit Sleeve

A credit sleeve is a type of business financing that is backed by physical assets. The “sleeve provider” here would offer collateral and working capital on behalf of another company, which is known as “sleeve recipient”. Essentially, the sleeve provider co-guarantees the outstanding credit arrangements that the sleeve recipient has with other lending parties. This works to help boost the overall credibility and reliability of the sleeve recipient.

Generally speaking, a credit sleeve can be considered a form of a business working capital loan. This is usually seen within the energy industry, where the credit agreement is backed by physical energy assets as well as certain cash flow obligations for the sleeve recipient in order to manage the business operations. Businesses go for this option when they see a decline in their credit quality, which could affect their ability to secure traditional forms of business funding. In some cases, a credit sleeve can also be the best option when a business does not have any other sources to finance its operational costs.

Credit sleeves work as a co-guarantee between two parties, where one of them contractually backs the other and offers a guarantee to the lending institutions that all the debts would be repaid in time. In case the sleeve recipient fails to repay the loan amount as scheduled, the physical assets put as collateral by the sleeve provider can be seized by the lending party to pay off the debt.

Typically, this type of business financing is opted by established companies when one of their subsidiaries is financially struggling and cannot avail any traditional funding from lenders. In such a case, the financially stable subsidiary can offer a credit sleeve backed by its physical assets to the economically weaker subsidiary, which in turn would make the lending parties feel comfortable to offer a loan to the financially struggling subsidiary. The sleeve is taken as a short-term financing arrangement, which allows the weaker subsidiary to secure the required working capital to manage its operational costs. This form of business financing is seen amongst joint ventures as well.

Note that a credit sleeve is different from asset-based business financing, and works as a financial helping hand extended by one business to another to meet short-term economic difficulties. It differs from reserve-based lending as well, where the energy company pledges its reserves as collateral to secure the loan amount. Similarly, it differs from pre-export financing too, where only the first proceeds from the sales are used to repay the loan amount.

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