Strategic financing transactions are complex, delicate puzzles. Each player must bring in the right piece at the right time for a transaction to move forward successfully and efficiently.

Lenders, financial advisors, and investors have historically relied on traditional solutions like mezzanine financing to solve capital gaps in multi-layered, complex financing partnerships, but a new approach to filling these gaps has emerged as a strong, more accessible alternative.

Non-mezzanine, non-dilutive, sub debt financing, provided by private credit lenders, is emerging as a challenger option to bridge capital gaps in complex, strategic financing transactions.

Flexible Financing for Dynamic Deals

In M&A transactions or high-growth companies, where large dollar amounts change hands across multiple stakeholders, decision-makers often rely on multiple or specialized lenders to fill gaps in the capital structure.

Mezzanine financing has cemented itself as a staple solution for these scenarios, acting as a source of supplemental funding, but this type of financing does come at a cost and usually has a long underwriting process.

Mezzanine financing tends to not only come with higher interest rates but often includes warrants or other equity conversion features and may include restrictive covenants that can limit a business’s operations.

On the other hand, non-bank sub-debt offers flexibility and generally features similar interest rates but fewer or no restrictive covenants and no equity stipulations. The key is fast flexibility and the ability to preserve ownership, which has become more important to key stakeholders.

Non-bank sources of sub-debt are appealing in buyouts, recapitalizations, or growth opportunities, where the company needs access to immediate capital but does not want to erode ownership or introduce restrictive covenants.

It supports faster deal conversions, reduces complexity, and eliminates lengthy negotiations associated with mezzanine structures. And, with less stringent eligibility requirements, sub debt from non-bank lenders is a more easily accessible method of accessing capital.

Efficient Alternative for Asset-Based Transactions

Tangible assets drive asset-based transactions, but companies without sufficient asset coverage to meet collateral minimums may require a different solution.

Non-traditional sub debt works harmoniously with this asset-based capital structure by providing a fast and flexible tool to add additional capital.

• When taking on new clients with first liens against their assets, a partnership with a non-bank sub debt lender can offer a fast boost to liquidity for borrowers with needs larger than the collateral pool can support.
• If a client falls out of a collateral formula or borrowing base, sub debt can fill new gaps, make the senior lender whole, and reduce balance sheet risk for the lender quickly and efficiently.

Modern sub debt solutions can also support clients' overadvance when it doesn’t make sense for the senior lender to do so.

Instead of turning down the request, senior lenders can partner with a non-bank sub debt provider to cover the client’s capital request without overextending themselves. This enables stronger business relationships, better client performance, and efficient risk mitigation.

A new wave of flexible sub debt providers are unlocking speed and efficiency for traditional asset-based lenders. Transactions locked by capital gaps can find their missing puzzle piece, while the senior lender maintains first lien rights and protects themselves against risk.

Looking Ahead

Non-bank lenders are filling a critical niche for middle-market companies and those seeking faster, more flexible financing solutions to address capital gaps in complex, strategic financing transactions.

This trend is expected to accelerate as lenders and investors search for more transaction resources and businesses look for ways to balance growth with timely control over their capital decisions and delivery.

As a leading provider of sub debt financing under $10 milliion, our team at National Business Capital is working to raise awareness across the asset-based lending industry about innovative financing partnership opportunities.