The Benefit of a Loan with a Long-Term vs. Short-Term Maturity

Posted on: December 5th, 2017

Benefits of Loan Deciding to participate in a marathon, running a distance of 26.2 miles, requires adequate preparation, perseverance and willpower. Accelerating a company’s growth, from mid-size to large, is like running in a marathon.

It requires tenacity along with a nourishing capital base, and long term thinking. Companies in pursuit of big growth need to have a long term runway ahead, as there are many steps along the way.

Ideation, innovation, product development, market development all happen in a sequential timeline. Capital headroom and resource availability are critical so the Company has the wherewithal to get through these growth steps and expand.

When you are funding growth, it is always better to have a longer term maturity loan, as it gives more time and flexibility to get to the finish line of the race.

A loan with a long-term maturity provides more optionality and financial flexibility

The bolder the growth plan, the more things can go wrong, and the more things can get delayed. When you fund growth with a short term loan, principal repayments start right away.

This means cash is leaving the business to repay the lender at a very early stage of development. This cash leaving reduces the amount of internal liquidity and reduces the Company’s liquidity buffer.

When the term to repay is longer such as 5 years or even 10 years, there is more financial flexibility and more strategic freedom to the growth journey. This enables more time and space to invest in things that emerge as opportunities along the way.

There may be a new product or idea that emerges. There might be an opportunity to expand with a larger product line than originally thought.

The point is that things are fluid and unpredictable along the growth journey, and capital is needed for cleaning up budget overruns and also for new speculative, high payoff areas.

The longer the tenor of the loan, the more capital bandwidth to ensure proper investment across the opportunity pipeline

Long-term maturity loans help to mitigate challenging and unforeseen circumstances.

A loan with a long-term maturity is easier to manage during tough times. The shorter the term, the higher the principal repayment and the more aggressive the lender is during a workout.

Long term loans tend to be more unsecured than short term loans, which gives the borrower the advantage in a work out situation with your lender. Cash flow lenders are the usual purveyors of long term loans. Their loans are cash flow based, which means they are dependent on the company to rebuild its cash flow for them to get their principal repaid.

In general, long term lenders such as mezzanine and unitranche lenders are cooperative when their borrowers are going through a challenging period. There is a huge difference to struggling company between having to make a large principal vs a small principal repayment.

Long-term maturity loans are better designed to help companies achieve ambitious high-value, long-haul goals.

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.