What is mezzanine finance?
Mezzanine finance is a structured way to borrow money for your business. It’s called “mezzanine” because it sits between the two traditional funding types – taking on senior debt, or selling equity.
Instead of seeing you borrow money, as with a regular bank loan (which are becoming increasingly more difficult for small businesses to secure these days), or sell a share of your business with equity, mezzanine finance combines the best of both worlds. In effect, it’s a mix of debt and equity that can give more flexibility to business owners.
A bank loan may have lower interest rates than mezzanine financing, but as a senior debt lender, the bank would need to be repaid first in the event of a bankruptcy. Plus, the bank has the right to sell a company’s assets to recoup the loan if the business defaults.
Be aware, though – mezzanine finance is considered a higher-risk form of financing than senior debt or equity. Mezzanine lenders typically require a higher interest rate for this reason.
How does mezzanine finance work?
When a business needs extra capital, it can turn to mezzanine finance as a solution.
With mezzanine finance, a business can borrow money from a lender and agree to pay it back later, just like a loan. But, what makes it unique is that the lender also has the potential to become a part-owner of the business. They’re investing in the company’s success while lending money at the same time.
This hybrid nature of mezzanine finance means that the lender takes on a bit more risk compared to a regular bank lender. So, in return, they may ask for higher interest rates or even a share of the company’s future profits.
Think of it as a flexible solution that helps small businesses take that important step forward. It can give your business the boost it needs without you having to give up too much control. It’s typically a win-win situation for everyone involved – provided you are comfortable with the higher interest rates involved.
Why is mezzanine finance used?
Mezzanine finance is used by businesses that are pursuing growth, but want to preserve their ownership structure. It may also be used by those who cannot get (or do not want) a traditional loan.
By combining elements of debt and equity, mezzanine finance provides an attractive option for businesses that require additional capital beyond what traditional bank loans can offer. It allows companies to bridge the funding gap and pursue ambitious growth plans, acquisitions, or other strategic initiatives.
Furthermore, mezzanine finance attracts the interest of private equity firms, venture capitalists and angel investors who are actively seeking investment opportunities with potentially higher returns.
These investors are drawn to mezzanine finance due to its hybrid nature, offering both debt-like interest payments and equity-like upside potential. They provide the necessary capital to businesses in exchange for the prospect of greater returns on their investment.
Who uses mezzanine finance?
Mezzanine finance is used by a diverse range of businesses across various industries.
Small and medium-sized enterprises (SMEs) often turn to mezzanine finance as it offers them an alternative to traditional bank loans, which may have stricter lending criteria.
Any companies looking to finance acquisitions or recapitalise their balance sheets can find mezzanine finance to be a suitable option.
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