Whether it used for facilitating liquidity for wealth diversification or succession purposes, for pursuing acquisitions, or for funding organic growth, mezzanine loans have become an effective source of financing for companies in the middle market sector. Filling in the niche created by the reduced availability of traditional senior bank credit and the reluctance of banks to lend under lenient terms and low rates, mezzanine financing, has become a preferred alternative providing smart, workable and beneficial solutions for middle market companies with strong cash flow and good business prospects.
The benefits of mezzanine loans for middle market companies
Middle market companies opting for a mezzanine loans find it to be an extremely advantageous source of funding capital since,
It provides a source of flexible long-term capital
Typically,mezzanine loans offer significantly more flexibility in coupon structure, terms, and amortization than banks and senior debt providers. Furthermore, mezzanine loans are customised to suit a company’s particular financial need, and generally require no collateral or a personal guarantee. Mezzanine loans are accommodative of a middle market company’s financial, operating, and cash flow demands.
It results in improved cash flows due to non-amortisation
Middle market companies using senior debt, are faced with a highly structured amortisation schedule with relatively short maturities, often lasting no more than three years. On the other hand, amezzanine loan does not require amortization during the term of the debt, leaving companies with an increased cash flow. Companies in the middle market sector can use the improved cash flow for various needs including paying down senior debt, investing in working capital, product development, andother expansion products, or accumulate the cash on the balance sheet to take advantage of future unforeseen opportunities.
It supplies a less expensive and tax-advantageous alternative to equity
In a middle market company’s debt structure, common equity is the most expensive form of capital and is not tax deductible. Amezzanine loan functions as quasi-equity on a company’s balance sheet. It results in the company having the same capital base but at a fraction of the cost. The interest payments on the mezzanine loan are also tax deductible. Mezzanine debt is often used an equity substitute and permanently reduces the amount of equity needed to grow the business.
Common uses of mezzanine loans in the middle market sector
The entry of mezzanine debt as a viable source of financing for middle market companies has channeled such loans to be used for various financing needs. The most common uses include,
Acquisition financing
For middle market companies looking to grow through acquisition, mezzanine loans provide a cost-effective solution for those seeking alternatives to raising expensive equity capital or to filling the gap created by too small a bank loan.
Growth Capital
Mezzanine loans are cheaper than equity and offer more flexible terms and covenants than senior debt. Mezzanine loans can be used for various expansion opportunities such as product development, research and development, or new market expansion. There is no limit to the way that a company can deploy proceeds from a mezzanine loan.
Shareholder Liquidity
In some cases, an owner does not want to sell but rather take some cash out of the company to diversify his net worth. Mezzanine loans, unlike senior debt, can be an effective way to fund a one-time dividend, providing liquidity and diversifying an owner’s holdings.
Attract Capital, an international financial advisory firm has a 25-year old knowledge base of the private capital markets. It has proven process and large mezzanine lender platform that can produce quick sourcing solutions for companies in need of mezzanine debt.
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