Posted on: August 3rd, 2020
Our economy is in a bifurcated state, as some businesses reel from the effects of Covid, while others prosper. Companies with rocket ship growth often struggle with tightening working capital financing, as their receivables growth absorbs all cash flow. A strong growth spurt will quickly tax a company’s available liquidity including cash and lines of credit. Conversely, companies with decelerating growth rates throw off cash as their working capital shrinks. These companies usually do not adjust their cost structures fast enough to save this extra cash flow for internal liquidity purposes. Ultimately, the Company will have lower revenue and go through a period of unprofitability. This causes a bit of capital tightness for a company, as traditional bankers become reluctant to advance at the time when the company needs investment to push into new directions. In both examples of growth and decline, capital is needed to fortify balance sheets and allow the Company to progress.
Mezzanine Debt – A Growth Funding Option
In cases like this, mezzanine debt lenders should be considered as a growth funding option. In the growth case, the Company needs extra financing to fund its transitional working capital and growth-related expenses. In the decline case, the Company needs capital to reallocate resources to greener pastures on the growth horizon. These transitional periods are not easy for banks to underwrite to as they are accompanied by unusual balance sheet gyrations that defy the smooth linear patterns that bankers like.
Mezzanine debt lenders are experts in understanding the many reasons why a company needs to invest to drive growth. Their capital is the lubricant that greases the wheels of new corporate growth. They are completely flexible as to how their borrowers invest their capital and are highly supportive of the Company post funding.
Companies jumpstarting growth in new areas need to outlay in product and channel development. They may have restructured their way back to the black but need to rebalance their working capital in anticipation of near-term growth.
Cash flow growth is best funded by cash flow lenders, such as mezzanine debt lenders and unitranche loan providers. They underwrite the future based on management’s vision and scale the loan to the current and future EBITDA, as opposed to the current balance sheet position. With a mezzanine debt lender providing capital support, a company can both rise again and financially reinforce its recent growth wave.