Alternative Financing Options for the Lower Middle Market

Since 2008, my firm has been engaged with over 150 lower middle market companies. A consistent theme with many of these companies is the lack of available capital – both traditional and nontraditional. Having refinanced $1.4 billion of debt within the lower middle market, I’d like to share how we have been successful with securing this capital over the last decade.

Since the Great Recession of 2008, there has remained a significant void in the lower middle market for capital. With the exception of very profitable businesses with strong cash flow and collateral, many companies simply cannot access capital other than extremely expensive credit, like credit cards and hard moneylenders.

We have been able to provide debt capital for our clients over the years using very creative methods. We have provided enhancements to existing lenders on our clients’ behalf that have allowed lenders to feel confident in lending to these clients. Additionally, we have provided new bridge capital to clients that we often will subordinate to the senior bank. This has been a great strategy when the bank cannot extend additional credit to the customer beyond what is outstanding due to regulatory constraints. We have also been successful with sale / leaseback financing for our clients that own their equipment.

Our belief is that this gap in available credit will continue as long as banks remain hamstrung by regulations. Other providers of capital are typically hedge funds or investment companies that will provide credit to a select group at double-digit interest rates. These hedge funds and investment companies typically will not begin to offer capital for less than $10M and this is usually more than the lower middle market companies need.

What the companies that are “stuck” in this situation tend to do is to max out their credit cards and get trapped in a death spiral with 25% interest that they are never able to pay off. We believe that there are a lot of ways to get creative on and off the balance sheet and that includes financing inventory, equipment and other strategies that may provide more collateral than they think. In truth, when navigating through the treacherous waters of commercial financing, it is critical to engage a professional firm that can help you successfully maneuver through this process. In addition to helping you get the capital you require, they can help you keep from feeling stuck or overwhelmed by offering you more creative options for financing.

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