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/

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.