Mind the Gap

Mind the Gap

Financing gaps emerge in M&A transactions when the buyer’s financing is not enough. Often bank loan availability shrinks the closer a buyer gets to the closing table. This can happen for a variety of reasons. The collateral exam may turn up some ineligible receivables or inventory. The credit committee at the bank may reduce the advance rates. Companies also experience financing gaps in their day to day business. Often, fast growth consumes increased working capital which can leave the company cash poor. As a company grows, it needs more long term capital to ensure liquidity and safe capitalization.

As a buyer, your ability to execute an acquisition rests on your ability to raise the financing required to close. The emergence of a gap can put the entire deal at risk. All acquisitions should plan for potential financing gaps and proactively seek sources of funds to fill the gap.
Fill the Gap

Regardless of how the financing gap emerges, whether through an acquisition or through fast growth, it needs to be swiftly addressed. The gap itself is usually a symptom of too much short term financing – such as asset based financing and not enough long term capital. If the gap is not rectified, it can lead to short term illiquidity and result in a drag on long term growth.

The best method to fill the gap is through flexible, bespoke capital that can address the short term need and provide long term stabilization. With acquisitions, this usually means using mezzanine loans as part of the acquisition capital. A mezzanine loan is long term capital that can repaid in a few years or can stay in place for 6 years. It does not require principal repayment which allows the company to keep its cash flow. Mezzanine lenders will stretch further than a bank and provide the same benefit as an investor at a fraction of the cost. It will allow you to address the short term financing gap and provide long term financing for future acquisitions. It does not force an exit on a business but allows for a variety of repayment and exit schemes.

Attract Capital’s lenders can fill your gap and create long term growth. Call us today to start the gap filling solution.