The case for mezzanine financing is overwhelmingly positive due to its uniqueness, versatility and flexibility. Mezzanine financing is a progressive form of lending based on the single most important element to any business – its cash flow. Banks are largely no longer providing progressively structured loans to companies. They care only about limiting their downside and pleasing the regulators. Business is about growth, innovation and expansion. Mezzanine lenders understand this and have adopted a big picture approach to loan qualification.
Mezzanine loan size is a function of a company’s EBITDA multiplied by a number. The multiple number is usually 2 to 4. This means the size of the loan is determined by how much cash flow a business has. For a growing business that has strong profitability but limited assets, this loan measurement approach is an enormous benefit.
The multiple approach to loan sizing allows a company to bypass regressive bank lending standards, which are generally based on an asset based approach. With a bank, the loan must be collateralized so if you lack assets, you cannot get the loan. With mezzanine, cash flow wins the day and the more EBITDA you have, the larger loan size you can qualify for. In addition, mezzanine financing operates on a long term time horizon.
Mezzanine lenders are patient providers of capital and are perfectly happy to wait for 5 years and collect only interest. Mezzanine principal repayment is usually at the end of the fifth year. This means that the business can use the mezzanine capital to expand the business and generate increased cash flow. This increased cash flow is used to further increase the size and the scale of the company, resulting in a larger and more valuable company.
This virtuous cycle of expansion increases EBITDA and the borrowing base of the company, enabling the company to repay the mezzanine principal at the end of the five year term. Mezzanine lenders are big thinkers and employ subjective and objective analysis in determining which companies to lend to. They understand how to grow companies and see themselves as passive backers of strong management teams. When you add it all up, mezzanine gives you more money, with more flexible terms, with high quality people backing you.