MEZZANINE FINANCING OPTIONS

Mezzanine financing has created opportunities for investors to secure cheaper alternatives to fund companies. The purpose of the article is to present an overview of mezzanine financing and discuss the various features of the debt. Included in the article is a discussion of the benefits associated with mezzanine financing as well as the risk and implications of incorporating mezzanine financing in a company’s capital structure.

CHARACTERISTICS

Mezzanine financing, also referred to as quasi-equity, comprises of both unsecured debt or second lien debt and has debt and equity characteristics. Mezzanine financing is a type of loan that is subordinated to the senior debt in a firm’s capital structure but is above the common stock or preferred equity. This form of debt can take the form of senior subordinated debt, convertible preferred debentures or as preferred equity. Such loans are frequently used for financing acquisitions or fuelling the fire with needed non-dilutive growth capital. Within a capital structure, it is junior to all debt. Mezzanine debt has a higher interest rate since the risk exposure is more than that of senior debt.
  

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The yields of mezzanine financing are the highest in the bond market and are riskier compared to senior debt. Mezzanine debt financing is usually based on covenant packages such as bank facility covenants or high-yield style covenants. The bank facility covenant often has maintenance covenants and is mostly based on the credit facility’s covenants. High yield covenants, on the other hand, can shield a bondholder from unfavorable actions by equity owners and safeguard a bond’s priority of claims.

Mezzanine debt that is similar to high yield debt has components such as optional redemption and call protection provisions that are comparable to high-yield notes. Similarly, mezzanine debt that includes some components of senior debt has mandatory prepayments secured to debt and optional prepayments at par, at low or decreasing premiums. For example, some mezzanine notes can be redeemed at 105% of their principal amount in the first year following the note issuance, 104% in the second year, 103% in the third year and 102% in the fourth year.

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BENEFITS OF Mezzanine financing

·      Mezzanine financing is valuable in the capital structure of a company. For example, the equity capital of a company is strengthened with mezzanine financing since equity holdings are not diluted.

·      Mezzanine financing also enhances the structure and creditworthiness of a company and has a positive impact on a company’s rating.

·   Like equity financing, mezzanine financing does not need collateral, thereby, companies have the flexibility to use capital to expand and to manage the operations of the company.

·         The use of mezzanine debt reduces the amount of equity invested in a company and lowers the after-tax cost of capital.  Additionally, the value of stocks held by current shareholders increases when mezzanine financing is integrated in the company’s capital structure.

·         In general, companies that use mezzanine financing have the flexibility to structure covenants, amortization and coupons to adjust and cover exclusive cash flow requirements. 

·         Mezzanine investors benefit from mezzanine financing as it generates higher rates of return. Investors also obtain steady returns from mezzanine funding due to contractual agreements to make interest payments.

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Alcor M&A is a leading advisory firm providing financial services with an emphasis on customized solutions in the areas of Investment Banking, Corporate Financing, M&A advisory, Joint Venture Advisory, Private Equity, Debt Financing  and  International Business Development.  These Services leverages insights,  relationships and a culture that emphasizes a strong orientation towards excellence.

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Business Loans: What Are Your Options ?

Borrowing money under right situation can give the boost to small business which it needs to reach its next milestone or to get off the ground. There are several options available to small business owners’ seeking out loans and credit, but it’s essential to know which finance lending option is better for your business and for demonstrating that your small business is a good risk, what information you will need.  It has been observed that start-up business mainly rely on personal loans from friends, family or borrow against credit cards for funding their ventures. Business loans, as well as lines of credit, are easier to obtain more established businesses, as they have a track record of management and cash flow to report. Still several other small businesses look Private Equity, Venture Capital, Seed Capital, Growth Capital, Working Capital and Mezzanine Financing as an alternative of traditional bank loans options. Below are some ways that may help you in determining the type of lending that suits your small business at any development stage.

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Business Credit Cards

If your business is incorporated, get a credit card for it in order to keep finances of business and personal expenses separate. As this will help you in keeping record of your business expenditure and personal ones by categorizing expenses, and will help you in establishing good credit history at the time when your business needs urgent funding. Take advantage of credit card and perks rewards such as zero-percent introductory rates, cash back or airline miles, balance transfer deals, and cards offering discounts for office supplies and gas. But always make sure that long-running balance along with high interest rates might eat profits of your firm. And your credits can be damaged, if you fall behind on payments. Always restrict your card usage to important business functions, as well as keep your balance below or at 30% of your credit limit.

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Borrow From Friends or Family

Most of the start-up business owners look for family or friends for initial funding of their business without any established business history. So, its better look for those friends or family members who can give you cash and business guidance as well. Prepare a business plan and ask for enough funds that take the business to the next level and it will be easy to lend money again if you prove him that you will repay on time, if in case you need it later.

Line Of Credit

For ongoing needs such as inventory management or seasonal payroll, a line of credit many proffer an open-ended access to cash if your small business has uneven cash flow. You can still qualify for the full requested amount, and then one can borrow as well as repay funds on the time. For long-term investments such as property purchase or making a larger equipment purchase, then a line of credit is not appropriate. So, better be prepared for submitting financial details of business plus tax returns and information of bank account for securing the credit. Furthermore, the yearly financial review is also required.

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Small Business Loans

Generally, small business lenders give loan to businesses that was operating profitably for continuous two years. A broad range of documents are required to be provided to the small business owners, so that the lender can easily analyze cash flow as well as the ability of company to repay loan along with interest. Also, first thing you should do is to calculate the actual financing cost, then project your monthly cash flow accordingly in order to see at what stage you might require need extra cash. And always remember that lenders may not provide 100% finance. Moreover, consider whether the funds borrowed by you will help in generating more revenue in the coming years or not because if not, then you may be better off waiting. Rather leverage any capital infusion through which you can get into sales and marketing, with the aim of generating cash for the business in the future. And in this way, you may not require to borrow again.

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Debt vs. Equity Financing: What's the Best Choice for Your Business?

It has been observed that financing business startups is not so easy feat. If one can swing it, bootstrapping is the best option but no matter what, one will require small amount of money for turning idea into somewhat tangible. If funds are not rolling in yet, it’s hard to make a top notch product. That is the reason why many startups and small businesses provide equity to investors and employees. It might possible that even if investors from outside are not for you, but still you may be interested in providing equity to employees. But the question is, how will you do it? If you are running a smaller business and are thinking to offer equity then stick with all your financing options. Many entrepreneurs think that the best and common form of raising money for their startup is equity financing. It involves the usual pitching to venture capital firms and investors for raising money in exchange for equity in company. However, this is not the only way of raising money for company rather debt financing can help in other cases also.

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Equity Financing

As it is said that private equity financing is not for all but it provides greeting option for debt financing to several business owners. In fact, private equity financing against debt financing cannot be charged with two major gripes business owners’ level due to risk with personally guaranteeing a loan and the constraint placed by it on available cash flow. If you have a great idea for running a startup business but don’t have enough cash for funding your business then equity is the best solution for you. The main two common equity types are:

Equity Financing: In this, in order to finance your startup business, you need to sell shares to outside investors.

Equity Compensation: In this, one has to offer percentage of company profits in exchange of less salary.

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Private equity eradicates the drawbacks of debt in that and for paying down debt, it does not divert capital from the business rather it shares risk in the business along with the entrepreneur. Another advantage of private equity is that you don’t need to pay right back to investors after they provide funding to your business. It means that one has more time for growing his business before he starts worrying about how he will how he will pay for it or not.  And in case business fails totally, one doesn’t have to repay. It is fact that investors either swim or sink or alongside the business owners.

Debt Financing

Debt financing is money that has to be pay back and it can take the form of a line of credit, a merchant cash advance, a loan, or a credit card. Using loan for obtaining capital or growth funds for starting a business is referred as Debt financing. Debt financing allows businesses to get the money they require for their business without giving away equity. Provided businesses can continue with the payments of interest and pay off all they owe and will get to maintain all the remaining proceeds in the coming years.

A number of sources are there for obtaining debt financing for your business. Some of the sources are outlined below:

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Private Lenders: It can come from lenders such as family members, friends, colleagues, relatives, spouses, and private donors from whom you can connect with for raising funds.

Traditional Lenders: It includes banks that may do advance financing in the various business forms such as lines of credit and secured as well as unsecured loans.

Personal Financing: One can choose this from for obtaining personal loans from traditional lending sources or can use credit cards for financing business using debt.

Modern Lenders: this type includes payday loan lenders and peer-to-peer lenders.

Moreover, private equity is actually an umbrella term for huge money raised directly from recognized institutions & individuals and pooled in a fund that mostly invests in certain range of business ventures. For considerable long-term gains, attraction is the potential. Generally the fund is placed as a limited partnership, with the investors as limited partners and a private equity firm as the general partner. Typically, private equity firms charge huge amount of money fees for taking part in partnership and be inclined to focus in a particular investment type. And debt financing has its advantages as well as disadvantages; it’s up to you whether you choose this kind of financing for your business startup will work for your requirements.

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How Cash-Flow Projections Can Help Grow Your Business

Cash inflow is the lifeline of your startup business and it comes from various sources such as receipt of a loan, interest on savings, payments from customers, monetary infusion from an investor, and investments. Cash is essential for running your business as you get payment option for various expenses such as stocking raw materials, the salary of employees, office rent, and other operating expenditure. In fact, positive cash flow is good as it indicates that your business is running smoothly. Also, when it occurs in a large amount, cash flow is better as it will permit you to do other investments such as hire new employees or open branch on other location and helps in growing your business further.

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Understanding Your Cash Flow

Typically, cash transfer in and out of your start-up business can be put in order into following three categories:

·         Operating cash flow: Cash associated with everyday operations of your start-up business like  gathering from clients and paying expenses

·         Investing cash flow: Cash associated with the sale or purchase property, plant, equipment

·         Financing cash flow: Cash transfer in and out to investors such as loans, line of credit as well as  equity

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All these categories and cash usage can be coupled to provide a detailed picture of how cash flow varies time to time. This variation can give you a clear picture of how much amount of cash your business actually has. This information will not only help you in understanding the current and past cash flow but also in projecting your future needs.

Projecting Your Cash Flow

Typically, the cash flow projections are driven by your operating cash flow. Ideally, operating cash flow is being projected either weekly or monthly for determining whether you need support from funding activities. As investing activities are designed on this basis for several businesses. Until and unless you are not in a progressive growth phase that needs the purchase of assets, you will not have enough cash for further investments. As this tends to be larger transactions, they have a considerable impact on cash flow of your business.

Usually, it has been observed that financing activities refer as plug in the model of your business cash-flow. Any insufficiency in investing or operating cash flow can be covered with money from various financing activities. As it takes time in finding potential lenders or investors in getting cash, it’s better to know in advance how much and from where your business will get funding for balancing its cash flow.

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Cash-Flow Tips

Cash flow depends totally on time. Specifically, when a transaction takes place, you don't feel its impact immediately. While projecting the cash flow of your business, do consider the following things:

Be Conservative

Vendors want that the customers pay early but customers mostly pay late. Usually, it does not happen the other way around. It can be essential to create assumptions considering negative cash flow for ensuring that you have enough credit for covering that cash shortage.

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Include a Minimum Cash Balance

While projecting cash flow of business, always remember that one will never complete month with negative cash flow. If the cash flow you are operating with is negative, then you can consider compensating all the way through asset sale or by borrowing cash.

Moreover, management of cash flow is critical for your business and considering your business expenses allow you to plan for future expenditure and know the projected profit from that business which in turn will help in managing your cash flow.

So is your business suffering from Funding problems? ALCOR MNA is experienced in finding the best Investors for companies and small businesses. We provide a broad spectrum of comprehensive fundraising solutions to cater the capital requirements of different companies across industries.

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For additional information on how we can help you finance your Company, Complete the Enquiry form. One of our representatives will contact you within one business day.

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Working Capital Loans-Finance to Fuel your Business

If the owner of a small business is constantly searching for new methods for growing his company then working capital loan is something after which he won’t look further. A highly efficient way of growing his business and generating capital is by securing working capital with a line of credit or a loan. Growing your working capital will secure your small business during the sluggish months, making sure that you can cover up your everyday operational costs such as payables, payroll, and receivables. Also, it will help in mitigating your cash reserves for unavoidable circumstances you might face while doing expenditure on your business.

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The available financing needed for covering short-term or immediate business requirement is referred as working capital. In order to determine how much working capital is available sum up your bank cash along with the money that customers owe you and your inventory value after that subtract what you owe to employees and suppliers. Small business owners always make sure that they have sufficient cash for not just starting a business but also keep it going. Lastly, you can also cover your business requirement with the help of personal funds by potentially harming your wallet. Often, working capital is quite difficult to find so it’s better to know the options that are easily available.

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The Good Part of Working Capital Loans

Often, private equity investors ask for some business percentage in exchange of financing the business. And for getting funding for your business you give few decision making power as well as the piece of your enduring upside. Luckily, working capital loans only need you to execute the payments you agreed-upon. Working capital loans come up with a limited obligation to the person who has lent money that you carry out and then moves independently.

Terms are Shorter

The short term working capital loans help the small businesses. They are planned to secure your cash flow alongside small shocks to its system. Therefore, one can expect a controlled payback time to be a piece of the deal and stay away from getting caught in a finance trap. The last thing what a smaller business needs are the huge monthly payments restricting you in the coming years as often becomes credit card financing case.

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Expenditure Stays in Control

Traditionally, a bank loan might have restricted fund usage which can turn into a blessing or a curse. If a small business owner gets a blank check, it may fight back to remain focused and end up exhausting the finances on other things rather on investing for what you have secured that loan. Typically, working capital loans are issued for particular opportunities and operational costs that raise revenue.

Get Cash Fast

Typically, bank loan applications are very time to take and time is something which can’t afford to lose if the business is restricted by the current cash flow. Often, they lead to rejection, and applying working capital loans for small business is a faster way of getting funds in comparison with the traditional bank loan approval process. Usually, one can gain access to his money within a week, in case he qualifies for a working capital loan. Every business requires cash for operating as well as for growth and as it grows certain changes arises then the requirement of additional funds may arise without warning, and traditional banking process might hinder the growth of your business which in turn causes missed opportunities.

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But now ALCORMNA is there as an alternative for funding your business to traditional financing methods. Our flexible, fast, as well as easy capital options, proffer the fund you need. And we make it sure that our short-term repayment means that you will grow sooner and faster. The funds can be used for any kind of business you want to do and it doesn’t require any proposal or business plan. Moreover, if you require extra cash in order to help in growing your small business, ALCORMNA is here to help. 

So is your business suffering from Funding problems? ALCOR MNA is experienced in finding the best Investors for companies and small businesses. We provide a broad spectrum of comprehensive fundraising solutions to cater the capital requirements of different companies across industries.

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For additional information on how we can help you finance your Company, Complete the Enquiry form. One of our representatives will contact you within one business day.

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Mezzanine Financing & Its Working

As businessmen have difficulty in obtaining access to their capital, market situations have compel them to think about mezzanine financing as a way of funding for the growth needs of business. Investors of mezzanine bridge the gap in capital required but not offered by various other sources. Mezzanine financing is actually debt capital that allows lender the right to change to an equity interest in the organization, if the required money is not paid back in that time period. Mezzanine financing is preferred equity or subordinated debt or combination of two. Typically, it is not secured and sits back on the balance sheet between equity and senior debt. Mezzanine investors tend to organize the notes in order to fit the company’s operating, financial and cash flow needs. Also, the terms are of 5-7 years and no amortization is required. This flexibility permits the management to make use of the proceeds for investing in R&D activities, acquisitions, working capital assets, market expansion, or just seize the capital in order to take advantage of upcoming opportunities.

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As the investors are unsecured, they usually don’t involve in a considerable risk as they believe that loan repayment must be paid from future cash flow of the company. Unless the organization generates enough cash flow, their investment might not get paid again within the desired terms and it may also be possible that if the organization is not giving profits. Consequently, expected returns might range between 20%-30% which can be costly. However, this financing source may act as bridge until the business owners refinance with cheaper funding options. As the investors continuously look for better opportunities with the organizations that have showed performance operation, strong management teams as well as business plans.

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Mezzanine Financing as Funding Option For Startup Business

If a business owner is looking for funding options for his startup business, then he must consider mezzanine financing. Typically, mezzanine financing is a loan that is offered to quickly to the borrower as well as it is hybrid of equity and debt financing. From the lender’s point of view, this source of financing falls between investing and loaning and in certain cases can be best of both worlds. On the other hand, from borrower’s perspective, business come across financial difficulties, the lender of mezzanine financing is the last to be repaid. Several other types of debt such as subordinated, senior subordinated and senior debt get priority over mezzanine loans. This financing source is not ideal for funding startup businesses but a good for funding those companies which are well established and do profitable business. Generally, these types of lenders leave out due diligence segment of loan reviewing application, and in response they look for higher interest rate.

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Furthermore, it has been observed that when the lender gets equity in the organization, it is unusual that the business owner loses control. Also, if the company starts growing in the next few years, the business owner may think about buying the lender out. Meanwhile, the company gets advantage from the trade acumen of the lender. Savvy lenders are now comfortable in gaining equity in order to earn interest as they believe that mezzanine lending is the better way to diversify. However, for several other lenders, the main aim is not to take over a business, but to understand big returns after debt repayment.

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Moreover, it has been observed that many business owners are attracted to mezzanine financing as it can be easily obtained. For qualifying, an organization doesn’t require a desirable product, an established industry reputation, a business plan and a history of making profit that illustrates the growing ability in the coming years, such as releasing new product, acquiring company of competitors or new territory expansion. So, while searching for mezzanine financing such as sources like private investors, mutual funds, banks, pension funds, and insurance companies. Also, mezzanine financing provide solutions for business owner’s requirement for cash to increase, or a method for investors to expand their portfolio and it is a trendy way to finance growing and profitable companies. 

So is your business suffering from Funding problems? ALCOR MNA is experienced in finding the best Investors for companies and small businesses. We provide a broad spectrum of comprehensive fundraising solutions to cater the capital requirements of different companies across industries.

Are you looking for a Financing Options?

For additional information on how we can help you finance your Company, Complete the Enquiry form. One of our representatives will contact you within one business day.

 

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