Posted on: May 27th, 2019
Mezzanine debt is a versatile form of capital, capable of sliding up or down the capital stack depending on your need. It owes this flexibility to its inherent advantage of evaluating businesses on a cash flow basis. Mezzanine lenders look for companies with strong cash flow and established market positions that have a clear view of their growth path. Due to their ability to fund into future growth, mezzanine debt providers are more understanding of the totality of a company’s capital needs. At times, mezzanine funding is needed for acquisitions. At other times, a company needs growth capital to invest in expansion or scale infrastructure. Mezzanine will certainly provide capital for that use of funds. There may be owner liquidity needs, as the company matures. Mezzanine even has an app for that. Whether it is an acquisition, growth investment, owner buy-out or just plain old working capital enhancement, mezzanine debt can be used. Mezzanine debt is a great form of low cost capital, when compared to bringing in equity. With an equity investor, there is usually big ownership dilution and a board level restrictions imposed. Mezzanine lenders get paid through an interest rate, approximately 10% t0 12%. That is usually the extent of their return, though at times they may get a small upside position in the company known as a warrant. The key to getting the most out of mezzanine debt in your company is understanding the best ways to structure it. Here are the Attract Capital’s 4 structuring tips to maximizing your mezzanine debt options.
- Increase your senior debt capacity – mezzanine debt is junior to senior loans. When you expand your junior debt capacity, it allows you to get a larger loan from your senior lender, which can be used to fund growth and acquisitions.
- Refinance high amort senior loans– senior loans such as bank loans require current amortization which can eat up your cash flow. Mezzanine loans are usually interest only for a 5 year period, so you only pay interest on the loan. This allows you to keep more cash in the business.
- One-stop approach – for smaller deals, mezzanine can provide all of the debt capital needed to close. Working with one lender makes the capital raising process more efficient and streamlines the closing.
- Equity replacement – mezzanine debt is a great substitute for equity. It is less expensive, less intrusive and more borrower friendly. Depending on your valuation and pro forma cash flow, mezzanine debt can be used to fund nearly 100% of your deal.