Mezzanine lending gives borrowers more options than simple bank loans, due to the customization of structure and terms provided by these lenders. Mezzanine is not a one size fits all approach. Mezzanine lenders will approach a loan with a different set of criteria and risk assessment, allowing companies to secure flexible terms and liberal covenants. The mezzanine world centers around a company’s EBITDA which means EBITDA is the single most important variable when designing a mezzanine structure. If a company has strong EBITDA and low leverage, it can create several financing scenarios.
Acquisition Financing – by adding your EBITDA to the target acquisition’s EBITDA, you can use this combined EBITDA to qualify for a mezzanine loan to fund 100% of the purchase price. As long as your company has a strong equity value and a good management team, a mezzanine lender can give you all the capital needed to close the deal. Most companies are not aware that this is possible as they usually talk to investment bankers that advise them to bring in an investor to fund an acquisition. Investors are too expensive in terms of share ownership and too intrusive in terms of board of director power.
Growth Funding – most banks will not fund losses as you launch a new development effort. They are afraid of losses and of having to explain the red ink to regulators. Mezzanine lending, because of their long term focus, are comfortable with losses from new development, as long as your existing business is performing in line with budget. A common scenario for mezzanine is to use it as a form of growth capital, in lieu of equity investment. Mezzanine loans do not require principal repayment until year 5 so the company will have enough time to expand, grow cash flow and then repay the loan.
Long term acquisition roll-up – Many companies see acquisition opportunity but cannot get capital to close. Mezzanine lenders are interested in lending to companies that can do several acquisitions over a 2 to 3 year period, allowing them to advance more capital to their borrowers.
In all of these scenarios, the companies design the structure and project out the future cash flow. The specifics of the loan repayment and the measurement of covenants are then synced up with the specific growth plan. This collaborative approach gives companies more capital, more flexibility and the confidence to grow into the future.
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