How To Secure the Best Middle Market Lending Option

Posted on: August 25th, 2022

middle-market-lending

Within the middle market, lending options abound as to loan type, deal type and size ranges. Even within the same middle market lending segment, each lender has a different approach to risk which makes for interesting points of contrast. Some lenders are comfortable stretching to 3.5 times EBITDA, whereas other lenders may only be comfortable lending at 2.5 times EBITDA. This situation underscores the degree to which lenders look at things differently and are often more comfortable with risk due to prior success with an industry or company type.

By providing more capital than pre-configured market levels, lenders go deeper and offer more value to their borrowers, enabling them to fully fund for planned investment. Best of all, the lender is providing a layer of capital that is traditionally unavailable and doing so at a lower price. This middle market lending structure arbitrage is available to all companies that articulate their business plan in a powerful way. When a company communicates their business plan in a sophisticated and yet relatable way to a lender, lender’s can often do more. The key in securing the best middle market lending options depends on a few important considerations that should be built into the fundraising process.

Structural Awareness – prior to starting the process, the Company should consult with a loan structure expert who can guide them. It is important to know how your loan request will be perceived in the middle market prior to engaging with lenders. This helps you capitalize on your strengths.
Business Plan Savvy – all companies need to tell a first-rate story to a lender, so they clearly understand your strengths and growth journey. The presentation needs to be crisp and clear, so the lender can immediately grasp and place the business into familiar context.
Clearly Defined Use of Funds – many businesses diminish their request by not specifying what the funding is needed for. If the funds are used for acquisition or growth, you need to explain the level of revenue and profit growth.
Distribution Strength – to get a better than average loan structure a company must talk to a large number of lenders, estimated at 25 or more.

When these elements coalesce, companies can extract the best option from the middle market, and meaningfully invest in their future growth.

In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.

The deal world thrives on the belief that the institution providing acquisition financing will deliver on their promise. Lenders usually telegraph their capital capabilities early on during the sales pitch and give their deal sizes and hold levels for their fund.

Most mezzanine debt borrowers are rightly focused on the downside of breaking a covenant and for good reason. Most borrowers have had to deal with overly sensitive banks in the past which often exhibit trigger happy default notices during covenant breakages, especially when they want to get out of a loan.