Are you looking to discover more about mezzanine finance, but not sure if it is the right choice for you? Here at TechRound, we take a look at what this type of financing is, and the benefits entailed with choosing it.
What Is Mezzanine Finance?
When we talk about mezzanine finance, this refers to the combination of multi-tiered financing of debt and equity. This is a loan to the lender that sits in between less risky debt (senior) and equity (considered to generally be a higher risk). It is generally considered like equity on a business’ balance sheet. This type of financing also gives the lender the ability to accrue equity interest in the company in question (or turn this into ownership) in the event of it defaulting.
What Is Different About Mezzanine Financing?
Mezzanine finance providers are quite similar to banks in the sense that they both can provide loans to businesses, however, there is one crucial aspect that makes mezzanine finance different. The difference is, is that with mezzanine financing there is often an equity component added to the mix. This means that if the business grows as a result of the financing, the provider will receive additional money, which provides an incentive for mezzanine lenders to give money even if an element of risk is involved.
What Are the Benefits of Mezzanine Financing?
There are a number of benefits when it comes to mezzanine financing. It is particularly advantageous if you are looking for an alternative that is cheaper than turning to private equity, it can be particularly helpful as a business to pursue mezzanine financing if your require extra capital in order to expand your company but are finding it difficult to get it if you have gone beyond senior debt borrowing capacity. When we talk about expanding the company, this capital may be used for large capital programs, shareholder buyouts or distributions. In summary, mezzanine finance is a less expensive version of other types of private equity funding available.
In addition, it can be a less expensive way to finance growth strategies that entail risk. In this scenario, mezzanine finance providers are more likely to give money than banks will. This is due to the fact that bank lenders tend to take on greater caution.
Other Important Details to Do With Mezzanine Financing
- You will usually need to meet certain criteria in order to be applicable for mezzanine financing. This is usually through the form of having a well-established product and reputation with a good track record in your chosen industry, as well as having the ability to demonstrate a viable, detailed expansion plan for the company, and a history of profitability
- When it comes to interest rates for this type of financing it is usually anywhere from 12 to 20%.
- It is important to remember that whilst there are clear benefits when it comes to mezzanine financing that other aspects should be taken into account to when choosing this option as an owner of a business. For example, you may well end up losing control and upside potential by deciding to go for mezzanine financing.