Management Buy-Ins in the SME Sector: Overcoming Funding Challenges

Management Buy-Ins (MBIs) and Management Buy-Outs (MBOs) in the small and medium-sized enterprise (SME) sector often face significant funding challenges, particularly when it comes to securing cash flow loans. Banks typically show limited or no appetite for providing these loans for transactions where EBITDA is below £500k. The reasons for this hesitation include perceived higher risks, a lack of expertise within the banks at this level, and insufficient returns on investment for the banks. Consequently, these transactions can struggle to secure funding through traditional banking channels.

Alternative Funding Solutions

At Sterling Capital Reserve, we have successfully funded MBOs and MBIs by leveraging debt finance from a private lending consortium. This approach provides a crucial funding line that can be blended with other financial instruments, such as invoice discounting, asset finance, and commercial mortgages. These complementary funding sources enable transactions that might otherwise falter due to a lack of traditional bank support.

The Role of Private Lending Consortiums

Private lending consortiums have become increasingly prevalent in corporate finance transactions. Unlike traditional banks, these consortium lenders often have a deeper understanding of and empathy for the unique challenges and opportunities of MBIs and MBOs. They are willing to adopt a more commercial perspective and take calculated risks to facilitate these transactions.

Our experience shows that this alternative funding is a “means to an end” to complete the transaction successfully. By helping many corporate finance professionals get their deals over the line, we have paved the way for banks later to refinance their debt within 6 to 12 months. While banks may initially be reluctant to fund MBOs or MBIs, they are generally more than happy to step in and refinance once the transaction is stabilised and profitable.