Mezzanine Capital for Funding Growth Opportunity

Mezzanine Capital for Funding Growth Opportunity

Companies generally seek growth capital funds as a means to expand or restructure their operations, to enter new markets or to finance a significant acquisition without a change of control of the business. Whilst senior debt is the least expensive form of growth capital, it is also difficult to obtain, leaving many companies struggling to find readily available capital when they need it the most. In this situation, mezzanine capital may be the right option to provide the necessary growth funds without having to give up much equity.

The importance of growth capital for SMEs

In the UK, companies with annual turnover of between £3 million and £10 million, play a vital role in driving growth, creating new jobs and sustaining the economy. However, it is these very businesses, the ones with the potential to grow rapidly, that often find it the most difficult to obtain the funding they require. This is because private equity investors are usually only interested in larger companies, and business angel investors find it more attractive to invest in start-ups. SMEs, which are stuck between the start-up and established company stage, find it difficult to access funding. Furthermore, SME business owners in need of growth finance often wish to retain control of their business and not give up valuable equity, thereby diminishing their chances to gain funds through private equity funding.

Mezzanine capital-filling the gap between senior debt and equity

Mezzanine capital, as a funding option for growth opportunity, provides a prudent alternative for SMEs seeking growth funds. Mezzanine debt, as the name implies, finds itself in the middle of the capital structure, between senior debt and equity. Mezzanine capital, which is highly customizable, is usually structured taking in the company’s specific cash flow needs. Typically, a mezzanine loan will be structured with a five to seven year term, during which the company will pay “interest only” until maturity, when the principal will be due. The interest rate generally ranges from 11 percent to 14 percent,of which 10 percent to 12 percent will be interest payable in cash on a monthly basis and the balance will be interest payable-in-kind, or “PIK” interest. In some cases, mezzanine lenders may also charge an up-front fee of up to 2 percent of the principal amount of the loan.

Advantages of using mezzanine capital for growth opportunity

Using mezzanine capital for growth opportunity also comes with several other advantages.

  • Mezzanine capital often results in a greater loan size when compared to bank loans
  • Typically, mezzanine loans last for about 5 to 7 years which are longer than most bank loans
  • The size of a mezzanine capital loan is based on the cash flow value and not the past asset values of the company
  • Mezzanine loans come with more flexibility and are generally less expensive and less intrusive than equity financing
  • Mezzanine capital comes with back ended principal repayments when compared to bank loans, resulting in greater cash flow utilization for the company
  • If correctly structured, mezzanine capital can provide 100% of the capital needed for a transaction, eliminating the need for equity investment

Attract Capital, with 20+ years of experience in the private capital markets is an industry pioneer in delivering mezzanine capital solutions for growth companies. With a well-developed lender platform and proven processes, Attract Capital can provide quick sourcing solutions for your growth capital needs.

Contact us now to set up a free consultation with our expert financial advisors.