The Stable Trees in the Lending Forest

Posted on: March 22nd, 2021


Most companies go through fits and starts as they traverse the various stages of growth. Their resource base may lag their growth rate, and their scale may outrun their systems. The Pandemic has exposed many different types of internal transformation pains as Companies pivoted to new ways of engagement and delivery.

External forces also create operational and financial imbalances of their own. Revenue can suddenly dry up, the hiring market can become very difficult, to name just a few. Throughout internal and external imbalances, companies need grounding, ways to ensure that their business is tethered to stability. This is like how trees work in nature. When a strong wind blows, they may sway, they may twist but they rarely upend, unless a severe weather event occurs. When pounded by wind, trees rely on deep root systems and latticed branch networks for balancing stability.

Financially, companies would do well to borrow a page from the tree play book when seeking a stable lender. When the strong wind blows in the economy, and companies start struggling, the best lenders in the Lending Forest are those that do not panic or head for the exit. These lenders, particularly mezzanine debt lenders, are great sources of stability during trying circumstances for several reasons. Mezzanine debt lenders have taken the time to understand the foundation of the Company, including its operation, management, and customer base. They are rooted in a strong understanding of the business, and usually are not phased with temporary difficulties.

Mezzanine debt lenders believe that tough times do not last but tough management teams with good businesses do. Because mezzanine debt lenders are focused on long term growth and long-term loan repayment, they understand the ups and downs that companies can go through. Because they have lent against the cash flow of the business, they practice a patient approach to short term difficulties, as they are 100% reliant on the future cash flow of the business. Mezzanine debt lenders are also firmly rooted in their historical experience of their portfolio companies. They tend to be seasoned senior people who have been through a few credit cycles and learned from them.

As a result, they can put the strong wind affecting your company into perspective.  Is it something that is an industry issue, that you have no control over? Is it something caused by one of your customers, that you also have no control over?  This type of thinking provides valuable grounding for companies suddenly buffeted by the winds of change.