Debts (unsecured or secured): Banks and commercial financial companies create loans based on either the level of assets in the company or the financial strength of its owners. Formulas are frequently used to determine maturity, availability and rates. Rarely does the loan have any type of equity kicker. Debt provides the lowest risk to the financing institution of the three layers. Today, the banks own almost all of the commercial finance companies, and this has reduced the level of competition among institutions. Many companies claim that this type of financing has dried up. BDSA, however, feels that although it takes a greater effort to discover active groups, there are new groups entering the market that are filling the gap.
Mezzanine or Cash Flow Lending: This type of financing includes features of equity and debt and is subordinated to the senior debt. It is priced to reflect the expense of the risk from subordinating, the leverage on the balance sheet, and the credit generated by the company's profitability, both historical and projected.
Equity and Venture Capital: Equity financing is not secured and, in fact, allows a company to borrow a larger amount of debt and mezzanine financing. The risk associated with this third layer of financing is the highest of all three and usually there is not any type of current income generated. The required return on investment is also the highest with this layer.
Normally different institutions supply each layer of financing. There are some groups, however, who will provide mezzanine and equity and others who will provide debt as well. Finding the correct group to invest is difficult in today's environment. Negotiating the best terms and conditions requires a high level of skill and experience that Bruce D. Schulman & Associates provides.
For a personal consultation with no obligation to you, please call Bruce Schulman at Bruce@SchulmanCapital.com.