The term “tranche” comes from the French word for "slice" and is commonly used in finance to describe how large loans or debt are broken down into smaller, more manageable parts, each with potentially different terms, interest rates, or repayment schedules. 

A large business loan may be divided into multiple tranches, with each portion disbursed at a different point in time, typically as the borrower meets specific milestones or conditions. Tranches may be contingent upon the borrower meeting certain performance metrics, such as revenue targets, or profit margins.

If these conditions aren’t met, the subsequent tranche may be delayed or even withheld.

Each tranche can have its own set of terms, including:

• Interest rates: One tranche may have a fixed interest rate, while another may have a variable rate.

• Maturity periods: Tranches may have different repayment schedules; some may be due sooner than others.

• Risk levels: Lenders may assign different risk profiles to different tranches, meaning some tranches could be more senior (i.e., paid back first in case of default) while others are more junior and riskier.

Tranches are often used for specific purposes to finance:

• Capital expenditures: CapEx projects include scaling infrastructure, purchasing equipment, or expanding facilities.

• Working capital: These loan tranches can be used for operational expenses like payroll or inventory.

• Growth: For major business expansion efforts and acquisitions.

Benefits

• Flexibility: Tranching allows a business to receive funds when they are needed, rather than all at once, which can help control borrowing costs and manage cash flow.

• Risk mitigation: Tranches allow lenders to spread risk and adjust the loan terms based on the borrower’s performance. They can reassess the business’s financial health before releasing additional funds.

• Tailored financing: Different tranches can be structured to suit the specific needs of the business at different stages, allowing more customized loan terms.