Why Cash Flow-Based Mezzanine Loans are Superior to Asset-Based Bank Loans

Posted on: November 29th, 2017

Cash Flow Concept Hand Growing your middle market company may seem like an uphill battle for you. There are just too many obstacles to think about.

However, your goal to reach the pinnacle of the “mountain” makes the journey quite exhilarating, in spite of the obstacles.

While planning for much-needed infrastructure or expansion funds for your growing company, you may have to decide on the proper loan to fund these capital needs.

One option is a traditional asset-based bank loan. You can pledge your hard-earned and precious assets as collateral along with a personal guarantee to get this type of loan approved.

Yet, the loan proceeds and the term of maturity may be insufficient to advance your investment plans.

Another option is a cash flow-based mezzanine loan, which uses a different approach, and can provide more proceeds and a longer term – all without a personal guarantee.

Cash flow-based mezzanine loans are:

a) More flexible and will give you a larger loan.

Mezzanine loans are completely cash flow based. The lender will only look at your EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization).

If you have very positive cash flow trends, then you should be able to get a mezzanine loan approved. Mezzanine lenders don’t care about the level of assets or collateral on your balance sheet.

They see your company through the prism of cash flow rather than asset value. Mezzanine lenders will look at your projected cash flow and gauge its strength in approving the loan.

Because the loan is based on a multiple of your adjusted EBITDA, you will receive a larger loan which can ease up funds for all your major plans and help you achieve your goals without worrying about a tight budget.

The term of your loan will likely be 5 years and with no requirement for principal repayment throughout the term. When you factor in all these points, you will see that mezzanine loans give you more foundational soundness to fund ambitious growth plans.

a) Better for the borrower especially during tough times.

With more funds, you can enjoy much more freedom investing for the future, with the comfort of knowing you have a lender whose loan repayment is tied to the future cash flow of the business. Mezzanine lenders are reliant on the company producing enough cash flow in the outer years to be able to repay their loan principal.

During tough times, (well, everyone hopes for a smooth ride, but then you never know), you will find that a mezzanine lender will be more supportive than an asset based lender, because they have only one way out of the loan – through the cash flow.

They act patiently and tend to be constructive with the company to help it get back on track.

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.