Why is Mezzanine Financing Valuable?

Mezzanine Financing is a mechanism that unleashes the power of accessible, flexible funding for growth companies. Most companies stumble to find a lender at some time in their history.

The bank default response to most growth company loan applications is “rejected”, simply because they do not have enough of the right type of collateral.

This has been a huge problem in the lending world over the past decade and contributed to the rise of a large capital gap in the United States and the United Kingdom.

As regulators sought to crack down on bank capitalization following the financial crisis, they required more stringent collateral standards which effectively penalized them to the extent they had uncollateralized loan exposures.

This dynamic coupled with a bias toward making loans to larger companies, has made it difficult for ambitious, asset light companies to access the growth funding they need.

Mezzanine financing upends the standard qualification criteria of assets, in favor of the more flexible measure of cash flow or EBITDA. Mezzanine lenders fund into the future cash flow growth of the business.

Using current EBITDA as a gauge, mezzanine financing providers underwrite the growth assumptions to gain comfort in their decision to advance the loan.

They gain their comfort through a free thinking assessment of product trends, industry changes and market dynamics. With a forward looking approach based on strategic factors, mezzanine lenders are unbound from traditional bank asset collateral requirements.

Rather than reject you because of the assets that you don’t have, mezzanine lenders embrace you because of what your cash flow can become. Given the fundamental strength of its approach, here are four ways that illustrate the value of mezzanine financing:

Mezzanine Financing is able to provide 100% of the capital need

If you already own a business which has some equity value, and need funding to acquire another business, mezzanine lenders will often advance all of the funding you need.

As long as they can discern that you have some skin in the game and are rolling value into the combined deal, they are eager to be your sole capital provider, allowing you to bypass bringing in an investor or putting in your own cash.

Mezzanine financing stretches deep into the funding need

Mezzanine earns its return through funding a larger loan and a more flexible repayment term. Whereas most banks are restricted from funding certain types of deals, mezzanine financing providers are not.

They will consider funding any type of business need including growth, investment, acquisition, refinancing and even buy out. They are long term focused and routinely provide 5 year interest only repayment terms.

Mezzanine Financing is highly scalable

Executing multiple acquisitions in a roll up strategy requires a large amount of funding. Mezzanine lenders are relationship-based and seek companies that will have ongoing capital needs, such as roll up acquisitions, to lend to.

It is not unusual to borrow 2 times the original loan size from your mezzanine lender or a syndicate of mezzanine lenders.

Mezzanine lenders are great partners

They are genuinely smart, responsible and supportive lenders who think like business people as opposed to bankers. Mezzanine lenders understand that things can go awry as they have usually been battletested by their existing portfolio.

They have only one way out of the loan through the future cash flow. This fundamental reality forces them to cooperate with the borrower and find mutually acceptable ways to increase cash flow over the long term.