Capitalize On a Proven Funding Platform: Mezzanine

Posted on: September 7th, 2016

Many profitable companies often use traditional sources of funding such as debt funding by issuing new bonds or shares. Sometimes, businesses revert to asking banks for a loan.

On the flipside, there is another alternative available: Mezzanine funding. Mezzanine funding or subordinated debt is a kind of financing that involves a company borrowing a portion of the sum from a special lender that advances funds against its cash flow value.

This category of financing provides flexibility to many types of businesses especially medium sized, middle market businesses. It has the advantages of being long term, low cost and flexible capital. But why should you capitalize on mezzanine financing?

Mezzanine improves the cash flow as it does not have amortization; it has a longer maturity period, from 5 to 7 years, whereas senior debt has a shorter maturity period and an extensive amortization schedule.

Companies can effectively utilize the increased cash flow to repay senior debt, invest in other areas of the business, or to save it as a reserve for any unforeseen circumstances.

Mezzanine financing is flexible and lasts for a longer period of time than conventional financing. In terms of coupon cost and amortization, mezzanine is preferable as it offers more ease when it comes to the repayment terms.

Furthermore, no collateral is required and it can be customized to meet the needs and demands of the borrower. This form of financing is less expensive than equity financing and does not involve giving up control to an equity investor.

Mezzanine, because its interest payments are tax deductible, is tax efficient and can help improve your return on equity. Through adding a mezzanine lender to your capital structure, it lessens your dependency on your bank or equity investor, and enhances the capital structure of the company.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.