What is Special Purpose Vehicle

Special Purpose Vehicle (SPV) is one way to finance a subscription model for product subscriptions in a product-as-a-service business model. Other options include:

• Gradual self-financing
• Sale & leaseback
• Bank loans or equipment leases
• Manufacturer/supplier partnerships
• Revenue-based financing (RBF)

What is an SPV?

A Special Purpose Vehicle (SPV) is a separate company set up to own the subscription assets and contracts. A lender funds the SPV, using those assets and their cash flows as collateral. You keep running the business (sales, servicing, support), but the assets and receivables sit inside the SPV. This ring-fencing can unlock larger, cheaper, and repeatable funding.

Think of it as a container: you place eligible subscriptions (and often the hardware) into the container; a lender lends against what’s inside; repayments come from the subscription payments that flow into the container.

How it works (step by step)

• Create the SPV: A new legal entity with its own bank account(s).
• Move assets/contracts in: New originations are booked into the SPV, or existing ones are assigned/sold to it.
• Agree a borrowing base: The lender defines what counts (eligibility rules) and the advance rate (e.g., 70–85% of the discounted value).
• Cash waterfall: Customer payments flow to a controlled account. Each period, cash pays:
  • fees/interest, then
  • required principal to keep within limits, then
  • reserves (loss/repair/servicing), then
  • any excess spread back to you.
• Revolving line: As old contracts amortize and new ones start, the facility revolves—you can draw more as you add more eligible assets.
• End state: Over time you can upsize, term out, or securitise; or let it wind down.

Where an SPV fits

• Scaling asset fleets: You want a repeatable, programmatic way to fund new units.
• Proven unit economics: Stable churn, solid margins, good payment success.
• Risk separation: Investors prefer assets and cash flows ring-fenced from the operating company.
• Path to lower cost: Senior, asset-backed funding typically prices cheaper than unsecured options.

When it’s a poor fit

• Too early: Small fleet, limited data history, unproven retention.
• Hard-to-assign contracts: Legal or customer-consent hurdles.
• Volatile performance: High churn, disputes, or weak recoveries.
• Tiny scale: Legal/admin overhead outweighs benefits.

Why teams choose an SPV

• Higher leverage than RBF/equity: Funding sized to the assets/receivables, not just current revenue.
• Recyclable capacity: As cohorts repay, capacity frees up for new draws.
• Cleaner story for lenders: Standardised assets, clear waterfall, controlled accounts.

Trade-offs to watch

• Setup complexity: Legal work (e.g., true sale opinions), bank accounts, reporting.
• Covenants & monitoring: Eligibility tests, concentration limits, performance triggers.
• Cash control: Payments may go to lender-controlled accounts; audits are common.
• Servicing duties: You (or a backup servicer) must handle billing, collections, swaps, and returns.

FAQs

Is an SPV off balance sheet?
Depends on accounting/control tests. Economically, it ring-fences assets and cash flows; check presentation with your accountant.

Will customers notice?
Usually no. You remain the servicer; payments route to controlled accounts behind the scenes.

Can the SPV hold both assets and contracts?
Yes—often improves advance rates versus receivables-only.

Can I mix SPV funding with RBF?
Yes, but avoid conflicts: the SPV lender typically requires first claim on SPV cash flows.

What happens if performance dips?
Triggers can block new draws and force faster amortisation until metrics recover.

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