Posted on: June 2nd, 2020
Growth is the essence of all business value. Fast growth companies sport high valuations, often well beyond financial fundamentals. Scale-up speed is paramount for tech companies who are first to the market with a land grab opportunity. Established middle market companies often have restrained growth rates as they enter middle age for a variety of reasons.Once established, an internal momentum takes over making fast growth harder to catalyze. Capital access and ownership profile are a few of the reasons why this occurs.
Most companies rely on their internal cash flow to fund growth, leading to only small, trickle-like infusions incapable of funding significant growth steps. Mezzanine debt turns this equation on its head and allows a company to crank up a growth rate to new heights. It is used to help companies transit through a high growth phase, with the potential to cause step change growth and much higher company value. With mezzanine debt in your funding plan, you can double or triple company size in a 3 to 5 year period, increasing your current growth rate 50%+ or more per annum.
Companies often use acquisitions as the preferred way to achieve this. If you make the right acquisition, it can hugely increase company size and scope and help you expand into new markets. Acquisitions often compress 3 to 5 years of historical growth into one event. Capital required to complete them is usually large relative to a company’s cash flow, making them possible only with external funding. It well known in the market that mezzanine debt is a great funding tool for acquisitions. What is less known is the speed advantage mezzanine debt provides.
Speed Advantage of Mezzanine Debt
Here are 4 speed advantages you get by using mezzanine debt:
- Faster Full Access to Capital – Mezzanine debt structures give you all of the money needed for your strategic investment up front. Unlike internal cash flow, which is produced over time and can only be re-invested over time, you can fully fund your projects at the close.
- Take a Big Step, Fast – with Mezzanine debt, you have the capital bandwidth to scale up far more quickly than your internal funding would allow. Through closing an acquisition, you transform your size and enable new growth paths with new products and customers.
- Increase Pace of Innovation – often without large investments, R&D spending is underfunding and new business development spending languishes. With growth-based financing in the form of mezzanine debt, you can fully fund all of these strategic initiatives.
- Great speed for additional funding – most mezzanine debt lenders lend in a modular fashion and support future growth needs of their borrowers. Rather than waste time bringing in a new lender, it is far faster to take add on financing from your existing lender.