Posted on: June 11th, 2018
As a business looking to expand, you have a lot on your plate between targeting acquisitions, planning new strategies, maintaining internal controls as you grow, etc. The process of attaining the funds to catalyze your growth is just one more thing on a seemingly endless to-do list, and sometimes it can feel like standing at the base of a mountain looking up at the peak. With so much to worry about, middle market companies are increasingly turning to Unitranche financing to lighten the load.
Unitranche lenders are cash flow based lenders and seek companies with the following criteria:
- EBITDA greater than $7 million.
- Strong history of cash flow.
- High gross margins and EBITDA margins relative to revenue.
- Market leaders in their respective niches.
A Unitranche loan offers several advantages that more traditional forms of lending may lack, so it comes as no surprise that this method of financing has gained traction in the middle market. First and foremost, the process is more streamlined than alternative routes. While a company in the past may have had to lock in a senior debtor and then supplement those funds with a mezzanine or subordinated loan, Unitranche loans offer one-stop financing. The single loan is broken up into pieces: a line of credit, senior-term loan, and junior-term loan. Securing just one lender and eliminating an intercreditor agreement saves time on closing, time that could be valuably spent elsewhere.
When looking to grow aggressively, Unitranche loans can assist in raising larger amounts of capital than its counterparts by combining senior and junior debt. Often, too, Unitranche loans can actually provide a lower cost of capital in their blended interest rate.
Unitranche loans are an example of innovation in lending, in contrast to traditional forms of lending such as asset-based loans. Unitranche financing is still evolving, adding more and more nuanced options. Each middle market company has its own unique situation, and Unitranche lending can provide a perfect way to tailor funding to your specific company.
These loans are best suited for the following types of situations:
- Acquisitions of middle market companies.
- Accelerated growth roll-outs for middle market companies.
- Refinancing of bank loans and other forms of junior loans in the capital structure.
- Leveraged dividends or minority recapitalizations.
Unitranche loans can be sourced from a variety of capital providers including business development corporations (BDC’s), small business investment corporations (SBIC’s), and private debt funds. Some aggressive banks also have the ability to stretch further and provide Unitranche like flexibility with bank-like pricing and terms.