There is over $2 billion in un-invested capital headquartered here in Greater Philadelphia. With an abundance of financing options, it becomes difficult to determine which source works best for your company.

One of the Middle Market Action Team’s (MMAT) top priorities is to strengthen knowledge of financing opportunities at various stages of growth and how best to access the capital needed to support strategic growth planning.

Through the year, MMAT has been working on Funding Your Future: Capital Resources for the Middle Market. These resources are intended to educate growing businesses about the various types of nontraditional lending that’s available and to prep the business owners before diving headfirst into the lending process.

To date, MMAT has produced 2 capital resources focused on Asset-Based Lending and Mezzanine Debt, with an additional resource coming at the end of this month focused on Cash-Flow Lending.

Asset-Based Lending

Asset-based lending is a business loan based upon the value of underlying corporate assets such as accounts receivables and inventory. Asset-based lending requires greater monitoring, often with monthly borrowing base certificates. Banks generally require field exams and/or appraisals to substantiate the collateral value.

Typical Uses
  • Businesses with weakness or inconsistencies in cash flow
  • Businesses with higher than industry standard leverage
  • Businesses with high seasonality
Typical Providers
  • Traditional banks
  • Non-traditional lenders (short-term loan lenders that are often not heavily regulated by state or federal agencies) that will provide higher risk loans
Types of Users
  • A startup company in need of a revolving line of credit to hire more staff and maintain service levels
  • A manufacturer with a stockpile of product inventory on hand with a projected growth of doubling in the next 6 months
  • A small firm needing immediate funding for a time-sensitive merger

Mezzanine Debt

Mezzanine debt is a form of financing that is part debt and potentially involves equity. That equity generally is in the form of warrants and is exercised in the future. The debt can be secured or unsecured, but that depends on the deal with the lender. Its repayment profile is often back-ended over a five- to seven-year period.

Mezzanine debt (also known as subordinated debt) falls under the umbrella of junior capital. Second lien debt and unitranche debt (when a lender who provides debt financing in multiple layers) also fall under junior debt.

Typical Uses
  • Large growth steps such as acquisitions and buyouts or large growth projects such
    as plant expansion or manufacturing center
  • Projects requiring more than two or three years of time to mature
  • Alternative to selling large amounts of equity outright
  • Management buyouts
Typical Providers
  • Some commercial banks provide mezzanine lending, however most do not. Traditional commercial banks can be a good step in identifying mezzanine lenders
  • Specialty lenders will also provide mezzanine lending
  • Private debt funds
Types of Users
  • Companies that have steady customers and repeat revenue annually, and consistent EBITA
  • Companies in growth industries, provide services to those in growth industries,
    or work within a fragmented industry with a lot of opportunity for innovation
  • Business owners wishing to keep as much control as possible

Cash-flow lending

Stay tuned for the release of MMAT’s next capital resource on Cash-Flow Lending – coming July 2019.

Cash-flow lending is a form of financing that uses a company’s (or individual’s) future cash-flow estimates and past revenues to borrow money in the present. Lenders will decide to approve a company or individual based on factors like seasonal sales, expenses, customer revenue, etc. Cash-flow lending is one of two popular forms of borrowing (the other popular route is asset-based lending).

Typical Uses
  • Often, but not always, there is less paperwork and documentation required than a traditional loan
  • Companies can receive funding without having to put their physical assets at risk
  • Companies can receive funding fairly quickly (usually within 24 to 72 hours) from lenders because the time required to appraise the value of collateral doesn’t exist
Typical Providers
  • Local banks and credit unions typically offer cash-flow lending. If they do not offer cash-flow lending, they offer a knowledgeable resource to reputable cash-flow lenders
Types of Users
  • Companies who possess an excellent credit score, though less reputable credit is typically accepted
  • Companies who have consistent high margins but might have minimal or non-existent physical assets
  • High-growth or acquisition-oriented companies hoping to expand and diversify

The Mighty Middle Market

The Chamber’s Middle Market Action Team (MMAT) drives rapid growth in companies with annual revenues between $10M and $1B through targeted programs and strategies. MMAT brings together 80+ key stakeholders and top middle market executives committed to creating and sustaining long-term success for middle market companies. As a team, these executives are working through the Chamber to accelerate growth by leveraging regional assets and strengthening connectivity.

Interested in joining or learning more about MMAT? Contact Reggie Hall at 215-790-3675.