Mezzanine debt is an efficient way for a middle market company to facilitate liquidity that can be used to diversify wealth, pursue acquisitions, or fund organic growth. Mezzanine debt has elements of both subordinated debt and preferred equity, and is usually wedged between common equity and senior debt in a company’s capital structure.
Different from bank loans, mezzanine debt relies on profitability and potential of the business. Mezzanine debt is unsecured and commands a higher yield than senior debt. Middle market business owners could use a mezzanine debt for a number of different options. It can be an effective way to fund a dividend, providing liquidity for a shareholder.
It is a simple way to transition ownership from one person to another. Mezzanine debt can also be used to develop your business. A company can use mezzanine debt to support a merger or acquisition, improve cash flows, and create long-term growth and expansion. There are no limits to the way a middle market business can use mezzanine debt.
It is a perfect substitute for equity investment because it is set up with a long repayment term. It is becoming increasingly popular for companies that have strong cash flow and growth potential.
The best way to acquire mezzanine debt is to talk to a well-equipped financial advisor that understands the structure of mezzanine debt and how it would work with your company. Mezzanine debt is usually in the form of a 5-year term loan with only interest paid during the term. It has no personal guarantee from the owner of the company. The loan amount is based on a multiple of the business’ trailing twelve month EBITDA, or earnings before interest, taxes, depreciation and amortization. So if you have a strong EBITDA, you will qualify for a large loan.
Since 2008, more than $25 billion has been extended to companies by limited partnership mezzanine lenders. This shows the stability, maturity, and accessibility of mezzanine debt for companies attracted to this type of funding. For middle market companies with strong cash flow and proven success, mezzanine debt is the appropriate financing to help grow your business.
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