When the Funding Bridge Wobbles, Let Mezzanine Pave the Way

Posted on: September 15th, 2016

Most middle market companies reach a point when they just don’t have the funds necessary to expand further and grow. Traditional forms of taking a loan can be expensive and time-consuming; there is a shorter maturity period, and higher amortization levels.

If you feel that your funding bridge is about to collapse, then look towards mezzanine financing to fuel your business growth.

Wondering what mezzanine funding is? Well, it is basically a form of financing in which the lender provides you a sum of money against the cash flow value of your business.

Since it combines both the elements of equity financing and debt financing, it offers greater flexibility in terms, repayment and use of proceeds.

Let’s take a brief look at how mezzanine funding is the right choice for you.

Since there is no amortization, mezzanine enhances the flow of funds which can be used for a variety of purposes such as debt repayment, further investments, and/or saving the extra funds as a reserve.
It has a longer maturity period as compared to debt or equity financing, usually from 5 to 7 years.
Although the mezzanine lender acquires a small stake in the business, they have no control over the operations of the business, till the business is operating profitably.
Businesses don’t need to keep their assets as collateral, unlike with conventional sources of funding.
Repayment conditions related to the rates of coupons, duration of the loan, and amortization are more favorable. This is because the lending firm is more interested in the company’s value creation over the long term.
With mezzanine financing, you can repay the loan over an extended period of time. However, this cannot be said about traditional loan providers. You also have the option to repay if early if that suits you.
You establish a long-term relationship with the mezzanine lender, mostly because of the flexible financing agreement. This enables you to borrow more from the same lender and scale up your acquisition program and company size.

Sources

https://www.referenceforbusiness.com/small/Mail-Op/Mezzanine-Financing.html
https://www.mergersandinquisitions.com/mezzanine-funds/
https://www.inc.com/encyclopedia/mezzanine-financing.html
https://www.streetofwalls.com/articles/private-equity/recruiting-interviewing/mezzanine-fund/

Mezzanine debt loans occupy the risky echelon beneath the bank but ahead of the equity in a capital structure. They are naturally subordinated to the bank loan via an intercreditor agreement wherein the senior lender retains the power to block their interest or force them to standstill.

In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.

The deal world thrives on the belief that the institution providing acquisition financing will deliver on their promise. Lenders usually telegraph their capital capabilities early on during the sales pitch and give their deal sizes and hold levels for their fund.