BDC Financing: Subordinate Debt

The Business Development Bank of Canada (BDC) offers a range of financing options to support Canadian entrepreneurs and small to medium-sized enterprises (SMEs). Among these options, subordinate debt, also known as mezzanine financing, plays a crucial role for companies looking to grow, acquire, or restructure their business without significantly diluting ownership.

What is Subordinate Debt?

Subordinate debt, as the name suggests, ranks lower in priority than senior debt in the event of liquidation or bankruptcy. This means that senior lenders, such as banks, will be repaid before subordinate debt holders. Because of this higher risk, subordinate debt typically carries a higher interest rate than senior debt, reflecting the increased risk profile for the lender.

Why Choose BDC Subordinate Debt?

BDC’s subordinate debt offers several advantages:

• Growth Catalyst: It provides a significant injection of capital for expansions, acquisitions, or major projects that might be too risky or too large for traditional bank financing.
• Preserves Ownership: Unlike equity financing, subordinate debt does not dilute the ownership stake of existing shareholders, allowing entrepreneurs to retain control of their company.
• Flexible Terms: BDC typically offers more flexible repayment terms than traditional lenders, recognizing the specific needs and challenges of growing businesses. This may include longer amortization periods or interest-only periods in the early stages.
• Long-Term Perspective: BDC is a crown corporation with a mandate to support Canadian businesses, so they often take a longer-term view than commercial banks, focusing on the long-term success of the company.
• Bridging the Gap: It can fill a gap in the capital structure between senior debt and equity, allowing companies to pursue opportunities that might otherwise be unattainable.

Typical Uses of BDC Subordinate Debt

BDC’s subordinate debt is commonly used for a variety of purposes, including:

• Acquisitions: Funding the purchase of another business to expand market share or acquire new technologies.
• Expansion Projects: Investing in new equipment, facilities, or geographic expansion.
• Management Buyouts (MBOs): Enabling existing management teams to purchase the company from its current owners.
• Restructuring: Improving the company’s financial position by refinancing existing debt or recapitalizing the balance sheet.
• Working Capital: Providing additional working capital to support growth and operations.

Who is Eligible?

BDC’s subordinate debt is generally available to Canadian SMEs with a proven track record, strong management team, and a clear growth strategy. BDC will typically assess the company’s financial performance, industry outlook, and the purpose of the financing to determine eligibility.

Important Considerations

While BDC subordinate debt can be a valuable tool, it is crucial to understand the associated risks and costs. The higher interest rate and the subordinate position in the capital structure should be carefully considered. Companies should consult with financial advisors to determine if subordinate debt is the right financing option for their specific needs and circumstances. Furthermore, successful applicants typically demonstrate a robust business plan and the ability to service the debt payments.