The Hidden Risks Inside SPV and Nontraditional Financing Structures: What Every Board and Lender Should Know
Special-purpose vehicles (SPVs) and other nontraditional financing structures have become increasingly common, particularly in asset-based lending, private credit, and structured financings where specific assets are used to support liquidity without encumbering an entire balance sheet.
When designed and executed properly, these structures can provide flexibility, improve liquidity, isolate risk, and facilitate capital formation—for example, by allowing a company to finance receivables or inventory through a bankruptcy-remote vehicle while preserving operating liquidity and providing lenders with clearly defined collateral and cash-flow protections. As a result, SPVs are frequently presented to boards, lenders, and investors as bankruptcy-remote, well-collateralized vehicles with clearly defined governance and risk boundaries.
However, recent disputes and investigations reveal a consistent reality: When SPV formalities break down, the very structures intended to reduce risk can instead amplify it by concentrating exposure around asset ownership, cash flows, and lender representations. In distressed situations, SPVs are frequently at the center of litigation, regulatory scrutiny, and creditor disputes, particularly where asset ownership, cash flows, or borrowing-base representations diverge from documented transaction steps.
This article examines where SPV structures most commonly fail, why those failures matter in litigation and enforcement contexts, and how boards, lenders, and counsel can identify early warning signs before commercial issues become legal ones.
The Allure of SPVs—and Where They Go Wrong
SPVs are widely used for legitimate business purposes, including asset-based lending, inventory financing, receivables monetization, joint ventures, and structured investments. In theory, the SPV isolates a defined pool of assets and cash flows, providing lenders with clarity and priority while limiting exposure to the parent company’s broader risks.
In practice, the integrity of an SPV depends on a small number of foundational principles:
- The SPV must legally and economically own the assets it purports to own
- Cash flows must follow the transaction steps outlined in governing agreements
- Borrowing-base certificates must be accurate, timely, and independently verifiable
- The parent company must not retain control inconsistent with a true sale or with lender expectations
When these pillars are consistently maintained, SPVs function as intended. When they are not, the structure begins to erode.
In many investigated matters, failures did not stem from a single act of misconduct. Instead, they emerged through incremental deviations from documented processes. Inventory transfers were delayed or never completed. Cash was moved for operational convenience rather than contractual compliance. Borrowing-base calculations relied on stale or manually adjusted data. Over time, these “temporary” workarounds became standard practice.
The result is often an SPV that exists more on paper than in reality—operating as a funding conduit for the parent rather than a bankruptcy-remote, asset-owning entity.
The Transparency Gap: When Form Does Not Match Substance
A central risk of SPV and nontraditional financing structures is the transparency gap between what stakeholders believe is occurring and what is reflected in the books, records, and operational reality of the business.
While inventory financing frequently highlights these issues, the same risks arise with any asset class used to collateralize SPV financing, including receivables, intellectual property, equipment, digital assets, securities, and contract rights. The asset type may differ, but the failure modes are consistent.
Across investigations, this gap typically manifests in three recurring ways.
1. Assets That Were Never Legally or Economically Transferred
SPVs often purport to own specific assets that serve as collateral for financing. In practice, however, investigators frequently find that formal transfer steps were incomplete or never executed.
Common indicators include:
- Bills of sale, assignment agreements, or contribution documents that were drafted but never finalized
- Title, registration, or perfection steps that were never completed
- Counterparty records (vendors, customers, custodians) that continue to reflect the parent entity rather than the SPV
- Asset registers or subledgers that do not distinguish legal ownership
Whether the asset is inventory, receivables, equipment, or intellectual property, the consequence is the same: Lenders and investors may believe the SPV owns collateral that it does not legally control.
2. Cash Flows That Do Not Follow the Asset Structure
Another common breakdown occurs when cash movements diverge from the structure described in governing agreements.
Rather than cash flowing through the SPV in connection with asset purchases, collections, or permitted distributions, proceeds are often transferred directly to the parent entity. These transfers effectively operate as unsecured financing, even though the structure is presented as asset-based or bankruptcy-remote.
This disconnect can:
- Obscure the true use of proceeds
- Mask liquidity stress at the parent level
- Undermine representations regarding collateral isolation and priority
Once distress emerges, these cash-flow inconsistencies become central to disputes over ownership, recoveries, and lender rights.
3. Collateral Reporting Unsupported by Reliable Data
Borrowing bases and collateral certifications depend on timely, accurate, and independently verifiable data.
Across asset classes, investigations frequently uncover:
- Collateral schedules built on stale or incomplete data
- Manual adjustments made to meet availability targets
- Valuations unsupported by observable market inputs
- Systems incapable of tracking assets by legal owner
When collateral reporting is not grounded in reliable data, lenders may extend credit far in excess of realizable value, often without realizing it until a triggering event occurs.
Why These Breakdowns Matter in Disputes and Insolvency
When SPV formalities fail, the consequences can be severe and far-reaching.
Increased Risk of Fraud and Double Collateralization
When SPV structures lack clear ownership tracking and disciplined data governance, they can create opportunities for assets to be pledged multiple times—sometimes unintentionally, sometimes otherwise. Investigations frequently uncover situations where the same inventory, receivables, or other assets were simultaneously treated as collateral for SPV financing and reflected on the parent company’s balance sheet or pledged under separate credit facilities.
These breakdowns are often enabled by fragmented systems, manual reporting processes, and a lack of coordination between finance, operations, and treasury functions. When asset ownership is not clearly established and monitored, lenders may rely on borrowing-base certifications that assume exclusivity of collateral that does not, in fact, exist.
In distressed scenarios, allegations of double collateralization quickly escalate disputes, exposing borrowers and individuals involved in certifications to claims of fraud, misrepresentation, or breach of fiduciary duty. Even where intent is disputed, the inability to reconcile competing claims to the same assets can materially impair recoveries and undermine confidence across the capital structure.
Ownership Disputes in Bankruptcy and Litigation
If an SPV did not genuinely own the underlying assets, lenders may find themselves holding unsecured claims rather than perfected security interests. In insolvency proceedings, this question is often outcome-determinative.
Courts look beyond contractual labels to assess substance, control, and economic reality. Missing documentation, inconsistent records, and commingled operations weaken claims of bankruptcy remoteness.
Exposure to Fraud, Misrepresentation, and Breach Claims
Representations regarding asset ownership, borrowing bases, and use of proceeds become vulnerable when underlying data cannot be substantiated. Claims may extend beyond the borrower to individuals involved in certifications, oversight, or governance failures.
Regulatory Scrutiny
Regulators increasingly focus on nontraditional financing structures, particularly where investors relied on incomplete or misleading disclosures. SPV misuse can attract scrutiny related to valuation, disclosure controls, and internal governance.
Business Disruption and Loss of Confidence
Once questions arise about an SPV’s integrity, counterparties often reassess credit risk. Vendors may tighten terms, customers may seek assurances, and management teams may become consumed by document production and crisis response.
What begins as a technical issue can quickly escalate into a companywide disruption.
A Practical Framework for Detecting SPV Red Flags
Patterns observed across investigations suggest several categories of red flags that warrant closer scrutiny.
Structural Red Flags
- Missing, unsigned, or inconsistent bills of sale
- Unclear or conflicting title documentation
- SPV absent from vendor master files or purchase records
- Commingled bank accounts without clear transaction mapping
Financial Red Flags
- Borrowing bases that appear unusually stable despite operational volatility
- Manual overrides or adjustments to inventory datasets
- Significant working capital shortfalls at the parent masked by SPV draws
Behavioral Red Flags
- Reliance on a single individual for SPV accounting and reporting
- Resistance to document requests based on “historical practice”
- Pressure to certify borrowing bases without adequate support
Technology and Data Red Flags
- Inventory systems that do not track legal ownership
- ERP limitations preventing SPV-level transaction visibility
- Offline spreadsheets serving as the “source of truth”
Early identification of these indicators can prevent issues from escalating into disputes.
How Investigations Reconstruct Economic Reality
When questions arise, effective investigations focus on reconstructing what actually occurred, not merely what was intended.
A rigorous approach typically includes:
- Mapping the intended structure versus actual cash flows
Comparing contractual steps to real-world transactions quickly highlights deviations. - Rebuilding the inventory lifecycle
Tracing purchases, transfers, valuations, and sales to identify ownership gaps. - Re-performing lender representations
Independently recalculating borrowing bases, aging schedules, and valuation support. - Assessing controls and accountability
Understanding who had authority, visibility, and responsibility at each stage. - Quantifying financial impact
Measuring the difference between reported and actual collateral or recoveries.
These analyses provide critical input for counsel, boards, and lenders as they evaluate recovery strategies, restructuring options, or enforcement actions.
Strengthening SPV Governance Going Forward
While SPVs remain an important financing tool, recent disputes underscore the importance of disciplined governance.
Risk can be mitigated through:
- Periodic audits of SPV compliance with transaction steps
- Independent validation of borrowing-base data
- Segregated bank accounts with clear transaction tagging
- Robust documentation of title transfers and ownership
- Data governance controls that limit manual manipulation
- Regular cross-functional walkthroughs to align legal form with operational reality
SPVs work well—until they don’t. And when they fail, the consequences are often disproportionate to the original deviations.
Conclusion
Non-traditional financing structures are not inherently risky. But they demand rigor, transparency, and ongoing discipline. When economic reality diverges from legal form—even inadvertently—boards, lenders, and investors can face significant financial, legal, and reputational exposure. By recognizing early warning signs, strengthening governance, and acting decisively when concerns arise, stakeholders can preserve the benefits of SPV structures while avoiding the costly consequences of failure.
Boards, lenders, and legal counsel must actively verify that legal form aligns with economic reality. Proactive involvement in governance and compliance reviews ensure that these structures provide their intended benefits without introducing hidden vulnerabilities.
The views and opinions expressed in this article are those of the authors.
