Mezzanine debt is an advanced form of lending based on a company’s cash flow. It is can be overwhelmingly beneficial to a business because of its distinctive, multipurpose, and adaptable nature. When considering mezzanine debt, a business owner should consider some of the following attributes of their firm:
Financing Purpose:
How do you plan on using the financing once you receive it?
Creating an effective plan as to the use of funds is a key to successfully raising mezzanine debt. Many companies use mezzanine debt to acquire another business, improve cash flow, or create long-term capital.
Multiple of EBITDA:
EBITDA is the earnings before income, taxes, depreciation, and amortization. Lenders assess the riskiness of a business through assigning a multiple of EBITDA. For example, a multiple of 2 means that the total financing over the EBITDA is equal to 2. This would be considered a low multiple. The loan size is pegged to this EBITDA multiple. Market multiples range from 2.5 to 4.0 times EBITDA.
Capital Structure:
Mezzanine debt sits between senior debt and common equity in a company’s capital structure. It has a fixed interest rate, is unsecured and has a higher interest rate than senior debt. The flexibility it provides makes it a worthy funding route for businesses that struggle to acquire a bank loan or private equity investment.
Growth Strategy
Through mezzanine debt, companies through organic growth or acquisition growth. Often there is room to add new products, new customers or to sell more products to existing customers. Mezzanine debt is flexible enough to support any type of corporate growth strategy but is most closely associated with acquisitions.
Importance of Professionalism
Companies need to have a professional approach with good financial statements and a strong growth strategy before engaging with mezzanine lenders. These lenders are looking to back high quality people that they can trust with their money.
It is anticipated that companies seeking mezzanine debt, find an expert financial advisor with the experience and knowledge to help their business find the correct funding option for them. Financial advisors will have access to a strong mezzanine lender platform that will allow a company to connect to the necessary individuals to create a deal.