Posted on: April 18th, 2017
The UK Middle Market has faced a funding gap of large magnitude for some time. Some reports cite the funding gap as affecting upwards of 5,000 companies. The British Business Bank and other Government initiatives have taken the challenge head on and have provided backing for specialized middle market debt funds. These funds have proliferated, and have made loans to the sector. Yet all too often the loans are made to private equity backed companies, not owner operated businesses. Therein lies the rub. While the Government has primed the pump, too often the capital is not trickling to the middle market segment that needs it the most. To bridge this market inefficiency, non- PE backed companies need to commit to learning and executing innovative debt strategies, such as mezzanine or venture debt. If you find the right fund and implement the right structure, you can rise above the yawning capital gap and move forward. A mezzanine approach is often a better way forward – it is more bespoke, flexible and dynamic than most people think.
- Mezzanine financing provides capital to companies that lack hard collateral. The loan is often based on the cash flow or equity value of the business based on future growth. This allows you to use your current and future cash flow to qualify for a larger loan amount.
- Mezzanine garners most of its annual return through an interest payment as opposed to returns from share value. This means the lender will not dilute your share ownership and will also be more supportive as a financing partner.
- Mezzanine loan structures are flexible and tailored. The company‚Äôs financial and operating needs are taken into consideration to provide tailor made loans. The rule is an extended period of interest payments, with often a balloon principal payment on the back end. This helps you hold on to your cash and use it to grow faster.
- Mezzanine loans and venture debt generally do not require personal guarantees from owners. The source of repayment for their loan is the cash flow of the business, not the net worth of the founder.
Mezzanine loans have superior sizing, structuring and guarantee provisions, making them a fast growing alternative to the vexing UK funding gap.