Mezzanine financing and subordinated debt and cash flow loans are a solid alternative to many firms who are searching for capital in the ‘ grey area ‘. Whats the grey area? Simply speaking it can be the ‘ high ground ‘ between debt and equity in your firm, both of those having their own challenges to rise. Let’s take a Canadian walk through the high ground!
There are some typical situations in Canadian business financing that strongly lend themselves to ‘ mezz ‘ financing. Typically the word ‘ growth ‘ will come up often! … Simply because that’s one of the drivers all too often of the need for cash flow loans financing.
Business financing in general, certainly when it comes to lending is very tuned to ‘ ratios ‘. We have always tended to call them ‘ relationships ‘… a lot nicer term we think! But the reality is that a lot of the debt and cash flow and interest coverage ratios your firm currently may possess simply prohibit you from raising the capital you need… today! Naturally as we all know those ratios, covenants, etc, tend to be Canadian chartered bank driven.
Typical mezzanine and cash flow loans tend to be 3-5 years max… from a term perspective. The mezzanine and cash flow loans solutions you consider should be considered as an intermediate option, not a long term one. Sandwiched in between debt and equity subordinated cash flow loans are usually taken out by one or the other of those at the appropriate time.
Given the general nature of security, i.e. your cash flow, and your projected cash flow it seems to therefore make a lot of sense to ensure you have a management team that can convince the cash flow and mezzanine financing lender that ability to repay the loan is there. Common sense 101, right?
So what can cash flow loans be used for? Typical reasons include buying another firm, a buyout by the management team, simply growing the business, and working capital to fund ongoing and projected sales.
There are instances when the owners of a firm wish to recapitalize with mezzanine financing simply to recoup some of their investment… we would offer up that loading the company up with debt requires a strong case to do that. By inference to what we have talked about cash flow loans of this type are rarely for start up or early revenue firms, as those cash flows are somewhat unpredictable to say the least.
Speak to a trusted, credible and experienced Canadian business financing advisor who can determine if this types of financing suits your current profile. A successful mezzanine financing simply compliments and rounds out your full financial package, and provides the middle ground between our two friends, long term debt and equity.