Middle market lending refers to a large ecosystem of various types of lenders. They include banks, finance companies and debt funds. Middle market lending has expanded dramatically over the past 5 years due to the onset of new funds. The middle market segment is a stuck between a rock and a hard place.
It is comprised of companies that are not large enough to receive large bank loans, yet it is too large to receive small business loans.
The middle market is a broad market that is generally separated into two segments: the upper and lower middle markets. The upper middle market can reach high levels of EBITDA of around $75 million. The lower levels of the middle market sit around 10 million dollars worth of EBITDA.
In the upper middle market, large investments and bank loans or individual financiers can fund the companies. Middle market lending is a complex arena because middle market companies have options for funding that most are not aware of. Mezzanine funding is one of the best ways to fund your business if you are sitting from around $10 to $100 million of revenue.
Mezzanine loans are different from regular senior debt loans because you usually do not have to offer concrete collateral. Instead, mezzanine loans are focused on the cash flow side of things. The lender is protected by the cash flow of the company that they are investing in. In a mezzanine loan, there will be collateral in the form of a pledge stock.
The other form of middle market lending available for companies within the middle market is senior debt loans. Senior debt loans are generally protected by concrete collateral. Such collateral includes assets such as factories, real estate, inventories, equipment, and receivables. Middle market lending can be a smart move because it offers relaxed leverage levels and interest coverage.
Companies benefit when they can apply the relaxed loan parameters of a buyout loan, to funding the growth of their business. This is most prevalent with acquisition financing where a company uses middle market lending to fund a company purchase.
Most senior debt providers will struggle to provide all of the money needed to fund an acquisition. Middle market lending, due to its comfort with high company valuations, offers growing company more generous loans at longer terms.
Connecting growing companies with the efficient channel of the middle market lending, leads to more capital and aggressive growth. As middle market lending sees new entrants, it expands capital access for all deserving companies.