Mezzanine financing has become popular term for any business entity that might need financial help. Whether the company is publicly or privately held, these companies are opting for this type of financing when they want to borrow money or might even opt to let go the ownership title without letting people know about it. It is a mix of the traditional debt financing and equity financing, but in the end getting the benefits of both. In equity financing, it requires no collateral unlike the requirements of traditional banks while for debt financing it doesn’t involve giving an interest to the company.
However Mezzanine financing relies very much on high interest rates ranging from 20-30%. The reason for this is to make it profitable. A traditional bank loan usually hold real estate assets, but with Mezzanine financing it is completely different. The setup in this kind of financing is that lenders have the right in converting their stake to an equity or ownership in case there is a default in the loan.
This process is an appealing kind of liquidity if you are an owner of privately held company. It is a fact that a privately held company can’t achieve a fluid capital flow as compared to publicly held company. Mezzanine financing simply offers the answer to balance the situation without really going in public eyes.
In addition to this, lenders of mezzanine financers are not really interested in the company except if there is a default. The traditional equity investors usually want to take control which can be negative to the owners of the company. With mezzanine financing, it can be guaranteed that these financers will make a way for you to pay off the debt without really opting for default.
Mezzanine financing is really hard to receive compared to traditional bank loan because of the lack of collateral. The speed of lending is rather slow too. In order for a company to seek the help of mezzanine financing, it must first show a good track record in their industry meaning they got an established reputation and product. It also needs to show their history of profit or at least show no lost or break even. Aside from these two, they must show a good business plan for further expansion in the future whether through acquisition or wider penetration in the market. Because of the requirements, not every business is qualified for mezzanine financing. It is often seen as a solution for already successful business wanting to add more capital to their company. Typically a mezzanine financing is found in companies with venture capital and alternative lending institution that seeks higher return rate.
This funding comes in a form of stand alone subordinate and equity transactions. It is a great substitute to other forms of financing wherein they usually give up the interest of the company.
As a result of Mezzanine financing, companies can get additional financial power that includes merger and acquisition financing, emerging opportunity for growth, management buyout, corporate debt refinance, recapitalization, and restructuring the company.
