In order to appreciate why why Mezzanine Loans are best for middle market companies, we must first establish what a mezzanine loan is. By definition, mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company’s assets which is senior only to that of the common shares. These financings can be structured one of two ways, debt or preferred stock. It is a hybrid of debt and equity financing and includes a business owner borrowing money and paying interest to the lender along with additional return based on the future value of the company.
Mezzanine loans are important to middle market companies because as these companies grow rapidly, their capital needs tend to exceed the capital that is available to them. New companies are normally funded with the owner’s personal capital and loans secured from their own personal assets. Due to increasing regulations in the lending industry, banks no longer cater to smaller businesses and this has left them to fend for themselves to survive.
A middle market company is viewed as having three distinct segments:
Companies with EBITDA (measurement of a company’s operating profitability as a percentage of total revenue) below $10 million are coined “lower middle market” companies
Those
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They fill the gap that is left. These lenders often are categorized under the umbrella of institutional investment funds. They may also be made up of business development companies, SBIC’s (government supported small business investment companies and hedge funds. These debt providers understand that they are supporting a market niche by satisfying credit needs covered by operating cash flows as opposed to established collateral asset coverage. Mezzanine loans are attractive to highly profitable companies with limited assets. However, since these lenders depend highly on future cash flow of the borrower, the underwriting and monitoring are closely