When companies are exploring credit financing, they are often overwhelmed by the different options available. Most companies find that their traditional bank does not offer financing that meets their needs and turn to alternative lenders.
Alternative lenders are typically family offices, private equity funds, or other funds that silo off a portion of their capital to lend to growing companies. Depending on the lender, each alternative lender offers slightly different financing structures. These are the most common private credit financing structures available to companies:
Term Loans
Term Loans are typically secured loans with a fixed interest rate. Generally, Term Loans are paid back over a set period of time. Term Loans can range anywhere from a few months to as long as 10 years depending on a company’s situation.
Cash Flow Loans
Cash Flow Loans are term loans based on a company’s revenue and gross profit. The lender uses the company’s cash flow as collateral for the loan.
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M&A Financing
Some alternative lenders focus on M&A Financing. M&A Financing provides a company the capital it needs to complete an acquisition. The structures for M&A Financing can vary drastically depending on the situation. Some lenders will request an equity position as well, while some prefer to lend on a purely debt basis.
Factoring
Factoring loans are structured as credit lines, as opposed to term loans. With a Factoring loan, the lender purchases a company’s receivables at a discount, resulting in the company receives payment from their sales far quicker. The credit strength of the counterparty is highly important to the lender.
Accounts Receivable Financing
Accounts Receivable Financing is similar to Factoring, the main difference being that Accounts Receivable Financing does not involve the purchase of a receivable. Instead, Accounts Receivable Financing is a loan utilizing the company’s eligible accounts receivable as collateral. Just like with Factoring, the credit worthiness of the counterparty is very important.
Mezzanine
Mezzanine Finance is indebtedness that’s junior to the senior indebtedness but is senior to equity. Mezzanine Finance is usually employed in connection with transactions where senior lenders won’t provide the full amount of financing, and there’s a gap between the amount of equity and senior that can be provided and the ultimate purchase price.
Mezzanine Finance is characterized by high interest rates, from the mid teens up to the low twenties, including an equity component generally in the form of warrants or stock. Learn more about Mezzanine Finance ►
ClearThink Capital guides companies through the credit financing process.
We put our credit expertise and extensive network of lenders to use for our clients. Learn more and schedule a call with our private credit team below.
