Mezzanine financing fills the funding space between taking out a senior debt loan, whether from a commercial bank or a finance company, and giving up equity to an investor. Typically, mezzanine financing suits a company that has in excess of $10 million in annual sales and EBITDA (Earnings before Interest, Depreciation and Amortization) in excess of $1.5 million.
Businesses that benefit from mezzanine financing
Service companies are excellent candidates for mezzanine financing because their primary assets are accounts receivables, rather than inventory, equipment and real estate. Software companies, staffing companies of all categories, restaurant chains and a variety of other services use mezzanine because they have limited or no assets, yet they have strong cash flow. The further a business gets away from assets such as receivables, inventory, equipment and real estate, the more mezzanine finance becomes a viable alternative for financing.
Manufacturers, distributors and retailers, depending on the strength of their assets, also find mezzanine financing a workable funding option that limits the amount of equity required.
While each mezzanine deal is different, businesses can expect to pay in the range of 12 percent per annum. This kind of financing is commonly in place for three to seven years. The full amount is disbursed on Day One, payments are interest only, typically payable monthly and the principal is paid in full with the final payment. Transactions may include a PIK (payment in kind) clause; for example, a PIK deal could break down into a 15 percent overall interest rate, with cash payments of 12 percent per annum and a 3 percent per year PIK due with the final payment of the total principal amount due.
Finding a mezzanine deal
Trusted advisors are the best route to finding financing at this level. Mezzanine providers are experts in qualifying and structuring these deals. In fact, the point person for the financing will analyze the viability of the request quickly, to see if it makes sense, and if there is money available that falls within the parameters of the business seeking funding.
Capital Solutions has access to scores of lenders active in the mezzanine market. This means that Capital Solutions matches up the funding needs of our customer to lenders with a record of success in the customer’s niche.
Once all systems are go and the prospective lender has provided a term sheet, the timeline for the availability of funds can range from 45 to 90 days.
