Mezzanine financing almost always provides more liberal standards than banks because it is a superior form of lending. Mezzanine loans are based on the cash flow value of a business which means they are more flexible and easier to work with than a bank loan. Most banks loans are based on a strict asset formula, where you can borrow a fixed percentage against asset value. Also, banks always want personal guarantees.
Mezzanine financing is based on a formula of cash flow or EBITDA, where you often get 3 times cash flow and do not have to provide a personal guarantee. This is a far more aggressive form of lending and means you can qualify for more money. Mezzanine lenders do not require assets to collateralize their loan. They underwrite their loans to the reality that they will be unsecured and uncollateralized.
Mezzanine lenders understand this and make sure the company has stable financial performance and can weather any downturns. This makes them very focused on the soundness of the business and the quality of the management. Additionally, they require a strong growth plan because the future growth will provide the cash flow to repay the principal of loan. Banks underwrite their loans to asset quality and the recovery of asset value in a liquidation. If a company gets into trouble, banks usually run for the doors and want to be paid off from sale of assets. A mezzanine lender does not have that protection in their loan.
Because they are in second position behind the bank, if the company liquidates, they will write off their loan. This forces the mezzanine lender to be a patient, long term lender. Unlike a bank, who can be trigger happy and focus solely on recovering assets, the mezzanine lender must work with the management in place because they have only one way out – and it is through future cash flow. When your loan is future cash flow dependent, the lender is showing a huge vote of confidence in management’s ability to shape the future. Mezzanine lending is the better way to build a cash flow rich tomorrow for your business.