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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CONTACT:
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
Cash flow loan requirements in the Canadian business landscape might often mean that you need some form of mezzanine finance via ' mezz ' lenders or a mezzanine fund or in various large transactions a private equity fund. What are the requirements and challenges in obtaining such financing and how does it work? Let's dig in.
WHAT IS MEZZANINE FINANCING
Mezzanine debt solutions are cash flow loans that rank behind a senior debt lender to your business - so we can called them unsecured loans. In some cases, but not all a ' mezz' lender might also ask for a small equity interest. Because of the ranking of mezzanine financing, it is also known as ' subordinated debt ' as the lender in this type of financing has the security behind a senior lender, which typically is a Canadian bank ( but not always )
At some point in time, many companies realize they need additional capital to grow/expand. In some cases, it also might mean they are seizing the opportunity to buy a competitor. In some instances, this type of financing is a way for owners to take some cash out of the business based on the current assets and operating capital in the business. It's times like these that an unsecured cash flow loan makes the most sense.
ARE CASH FLOW LOANS DEBT OR EQUITY - IN A WAY THEY ARE BOTH
In certain cases, not always though the way to think about mezzanine debt/loans is that they are a mix of both debt and equity. The debt side of that equation is simple. It's an equity substitute that puts more cash on the balance sheet, therefore improving your overall relationship of borrowed funds versus owner funds.
One of the most common reasons owners/mgr seek cash flow loans is that the alternative for more senior or bank debt have been exhausted. What makes mezzanine finance even more alluring is that although it's a more expensive form of financing it's never more expensive than equity financing which of course dilutes the owner/owner’s position in the company. Ouch!
CAN YOU BUY A BUSINESS WITH MEZZANINE FINANCING / CASH FLOW LOANS? YES!
A mezzanine lender solution is a potentially solid way to purchase a business. This method of business financing can alleviate the pressure involved in arranging all the funds you need to acquire a business.
The most common form of cobbling together a total finance solution for buying a business is the owner equity/down payment, as well as debt financing and potentially a vendor take back, Included in the debt financing might be potentially an operating facility for the day to day running of the business, namely BUSINESS LINE OF CREDIT. When these 3 main components of the financing package will not satisfy the total need of financing a mezzanine debt is a logical solution to complement the financing and allow the purchaser to finalize his purchase with the right capital structure and working capital in place.
The advantage of that strategy is to lower the equity dilution component as debt is always less expensive than more equity in the long run. Another point is that because they are usually very custom-tailored to the particular cash generations of the company - bottom line = flexibility. The company must have a positive cash flow to be able to qualify for this method of financing and rates will usually be higher because of the nature of the lenders ' 2nd position ' behind a senior debt.
Future lenders to the company will view the financing as quasi-equity, which is of course a positive point in all those balance sheet ratios and covenants that will arise on future borrowings.
We made the statement that mezzanine financing is more expensive, usually in the ' teens' when it comes to the interest rate. Why is that the case though? Simply because unsecured loans are the 2nd position behind any other secured creditors and their senior debt. Although there might be a 2nd lien position on your firm by virtue of the new financing it's clear to all that 1st position security on assets is still always held by a senior lender, typically in Canada a Cdn chartered bank.
The most common explanation of why a mezzanine loan might be considered ' part equity ' is that in some cases the lender might request a warrant or option to buy into the company based on the financing provided.
While large or public companies use this financing and call it various names - convertible debt, warrants, junk bonds, etc the SME COMMERCIAL FINANCE sector in Canada can safely just call this an unsecured cash flow loan. Simple as that.
IT'S ALL ABOUT THE CASH FLOW
Mezzanine loans are all about ... you guessed it ' CASH GENERATION '! So to be eligible for this financing be prepared to demonstrate past, present and future positive cash flow.
CONCLUSION
If you're looking to access forms of funding you may not have previously considered seek out and speak to a trusted, credible and experienced Canadian business financing advisor.
