For many closely held private companies, it’s often difficult to obtain senior debt financing to support the financial needs of the business. Although the company may be well beyond the start-up stage, it may lack the financial resources to fund sales growth, new product or market developments or capital projects. The use of hybrid debt/equity investment known as mezzanine financing can be a viable solution to this financing dilemma. Recent market conditions have re-established mezzanine financing’s appeal as a tax-efficient source of long-term capital. With the reduction of traditional senior bank credit and the reluctance of banks to lend under the lenient terms and low rates offered over much of the last decade, mezzanine is one of the more effective vehicles for owners of closely held private companies interested in facilitating liquidity for wealth diversification or succession purposes, pursuing acquisitions, or funding organic growth.
Many CFOs view asset-based lending as a financing outlet of last resort. While that may sometimes be the case, such a view can lead to lost opportunities. As companies confront the tight credit markets coupled with the potential for weaker operating results, many CFOs now view asset-based lending as a viable option to finance operations and growth initiatives. Historically successful companies that have recently experienced losses may find the stringent bank underwriting parameters increase the risk that their existing traditional bank loans may be called and the company may be limited as to qualifying for increased or continued financing. Asset-based lending (ABL) arrangements can be an option to be used to retire existing bank debt and provide operating and growth liquidity until traditional bank financing becomes available.