How Does Mezzanine Finance Work?

Deciding to loan out means partaking in a huge risk. Thus, it is only crucial for you to be well acquainted with the financing jargon before you finally decide to accept the loan’s terms and conditions.

Mezzanine financing is not an exception. So let’s break it piece by piece and understand how this kind of financing works.

What is Mezzanine financing?

Mezzanine financing is one of the many types of development loans. For starters, it means the combination of equity and debt financing that allows the lender to turn to equity interests of the company once there is a default, or usually, after senior leaders and venture capitalists have been paid.

In mezzanine debt, there are warrants to which equity instruments are embedded and attached. It allows an increase in subordinated debt’s value, giving way to more flexible terms when transacting with bondholders.

Mezzanine finance is also interconnected with buyouts and acquisitions. These are used to prioritize new owners rather than the older owners to ensure the gain even in bankruptcy.

How Does It Work?

Because it acts as a bridge that connects the gaps between equity and debt financing, it has a higher risk than other kinds of debt.

It is situated in the middle in a vertical line, where pure equity is above it and pure debt below it. This only means that it can also offer higher returns if we compare it to other kinds of debt. Its rates are 12% to 20% annually. On good days, it could even reach 30%.

Thus, it is not news that the company uses the mezzanine funding to finance ongoing and developing projects and help acquire the time horizons between short and medium terms.

Mezzanine loan offers are often given by investors interested in long-term investments and even those currently funding the company’s capital. In structuring mezzanine loans, there are lots of characteristics that need to be considered, such as:

  • Mezzanine loans have higher yields compared to usual debts.
  • Despite being subordinated to senior debts, it prioritizes both common and preferred stock.
  • These loans are often unsecured debts.
  • It is flexible in terms of structuring where it could have part variable or part fixed interest.
  • In terms of the loan principal, there’s no amortization.

When Would It Be Ideal To Get A Mezzanine Loan?

Mezzanine loans are ideal for businesses that are in need of capital for their projects.

And because it is situated in the middle, it is an ideal alternative if you are in need of short-term funds or medium term funds.

Mezzanine finances are often used to fund the construction of large-scale production facilities and industrial estates. They’re also used to finalize acquisitions that cannot be completed using funds from senior financing. Which makes it a very viable business financing option.

Where can you get Mezzanine Finance?

You can apply to get Mezzanine finance through your local bank, your local financial institution, or maybe you can look for private equity or venture capital firm that can help you. However, it’s ideal to get these kinds of loans from a specialist that deals with these kinds of loans regularly.

There are many types of finance available to companies across the board. From bank loans to company purchase loans, there are many options that can help companies boost their performance. While each one has its pros and cons, one thing they all have in common is how much interest is paid to them by lenders.

What are the advantages and disadvantages?

In terms of the advantages, mezzanine financing may allow the investors or lenders to acquire equity in the business. Over time, it may increase the rate of return. The providers of this financing may also receive interest payments per month, quarter, or year depending on the contract.

It is also a rational choice for borrowers who prefer a tax-deductible interest. It is also more manageable because the loan balance will immediately tell a borrower the interest.

However, what makes it disadvantageous is the difficulty of securing it. Some owners would choose to sacrifice upside potential and control due to losses in equity. Also, the more extended mezzanine financing is in place, the higher the interest that each owner has to pay.

Talk To Us About Mezzanine Finance

Mezzanine financing is an excellent alternative for those who need short-term funds or medium-term funds. It is essential to be knowledgeable about the pros and cons of mezzanine finance before taking action.

Do you think mezzanine finance is right for you? Our team of highly competent and experienced professional brokers stands ready to guide you. They will provide you with useful information about the different types of debt you can choose from, as well as the best features of each debt type. And they will also help you find the best lender for your needs.

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