Posted on: September 20th, 2018
Growing your company takes a lot of work in the form of more people, more systems and more financial resources. The scale-up process is never as smooth or frictionless as it appears on an excel spreadsheet.
Growth is not a linear function with consistently manageable growth rates. When looked at historically, it appears to be linear but as you are going through it, it is anything but.
Faster growth needs capital, people and process as its fuel, and usually in that order. Regionally expanding companies need more people to oversee the new regions they are about to enter.
Product innovative companies need dollars to invest in development and marketing. Acquisitive companies need capital to purchase target companies and to invest in the integration process of bringing the two companies together.
All of the above scenarios are strategic projects that need upfront capital and a long term time horizon for the project results to come to fruition. Usually, these projects are money-losing or non-cash generative over the short term. In fact, initial assumptions may be off and new money may needed to get it on the right track.
Once you get past the first few years, the project gains traction, volume builds and revenue starts to flow. At this point, the project begins to start throwing off real profits, which adds upward momentum to your company’s profit trajectory.
This project cycle is the way middle market companies grow. The best ingredients to incubate this growth are the right amount of capital up front, the right project return time horizon, and a flexible repayment schedule.
For many companies, mezzanine financing whether sourced from a traditional mezzanine fund, private debt fund or a BDC, offers unbeatable value. Here are the 4 reasons why mezzanine lenders excel at unlocking faster growth for your company.
- More Funding – mezzanine lenders will fund you based on your cash flow and future growth, not your hard collateral. This puts them way ahead of collateral-based bank lenders and allows them to advance large amounts to capital to growing companies.
- Less Principal Repayment – mezzanine lenders get paid to be patient and are comfortable not having loan principal repaid until the end of the loan term – usually at the end of 5 years. This gives you more time and more cash to make your project successful.
- High Level Thinkers – mezzanine lenders are smart. The understand things quickly and can usually grasp what’s special about your company. They like companies that are special and that have strong customer relationships. Once they lend, they’re committed to you for the long haul and will usually be highly supportive.
- They fund the Gap – mezzanine lenders get paid to fund that hard to fill part of your capital budget that you cannot get from a bank. They accept higher risk, and in doing so provide meaningful capital that can help you do things that a bank loan cannot do. In many ways, they are providing the same type of capital that an investor would without taking your shares.