How To Secure the Best Middle Market Lending Option

Posted on: August 25th, 2022

middle-market-lending

Within the middle market, lending options abound as to loan type, deal type and size ranges. Even within the same middle market lending segment, each lender has a different approach to risk which makes for interesting points of contrast. Some lenders are comfortable stretching to 3.5 times EBITDA, whereas other lenders may only be comfortable lending at 2.5 times EBITDA. This situation underscores the degree to which lenders look at things differently and are often more comfortable with risk due to prior success with an industry or company type.

By providing more capital than pre-configured market levels, lenders go deeper and offer more value to their borrowers, enabling them to fully fund for planned investment. Best of all, the lender is providing a layer of capital that is traditionally unavailable and doing so at a lower price. This middle market lending structure arbitrage is available to all companies that articulate their business plan in a powerful way. When a company communicates their business plan in a sophisticated and yet relatable way to a lender, lender’s can often do more. The key in securing the best middle market lending options depends on a few important considerations that should be built into the fundraising process.

Structural Awareness – prior to starting the process, the Company should consult with a loan structure expert who can guide them. It is important to know how your loan request will be perceived in the middle market prior to engaging with lenders. This helps you capitalize on your strengths.
Business Plan Savvy – all companies need to tell a first-rate story to a lender, so they clearly understand your strengths and growth journey. The presentation needs to be crisp and clear, so the lender can immediately grasp and place the business into familiar context.
Clearly Defined Use of Funds – many businesses diminish their request by not specifying what the funding is needed for. If the funds are used for acquisition or growth, you need to explain the level of revenue and profit growth.
Distribution Strength – to get a better than average loan structure a company must talk to a large number of lenders, estimated at 25 or more.

When these elements coalesce, companies can extract the best option from the middle market, and meaningfully invest in their future growth.

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.