Mezzanine Lending Poised for Greater Growth in the Debt Market
Mezzanine lending has come of age and is breaking out into the mainstream. As banks pull back and investors demand higher returns, companies are discovering that the mezzanine approach is the best of both worlds. Mezzanine has tremendous value due to business owners for two reasons. It is non-dilutive capital and guarantee free. Most business owners assume that mezzanine financing requires a personal guarantee, like bank loans do.
They do not require personal guarantees as they focus solely on the creditworthiness of your business when making the loan. Mezzanine lenders set up their loans so that they are paid to wait. With attractive 5 year terms and principal repaid at the end of the term, these loans give companies the opportunity to expand their cash flow and then reinvest that cash flow to scale the business.
These lenders can give you a much larger loan than a bank, but the interest rate is much higher than a bank. The rate reflects the risk of the lender being in a second position with a loan that is uncollateralized. Mezzanine lending is become a direct lending alternative for companies with increased capital demands and decreased bank support. Banks have retrenched to offering only asset based loans to middle market companies with strong financial statements.
As middle market growth accelerates, companies have a funding gap that the bank will not supply. In this case, borrowers are using mezzanine loans like equity to reduce their short term loans and provide more permanent junior capital for the business. Increased junior capital on the balance sheet naturally facilitates long term growth such as acquisitions and new business development.
. With new forms of mezzanine in the market such as business development corporations and second lien lenders, there are new suppliers of capital ready. As mezzanine becomes more competitive, its pricing will decrease and result in even greater penetration into the debt markets.