Mezzanine financing is a business loan that has both debt and equity features. Just as a mezzanine floor slots in between two storeys in a building, mezzanine financing is a kind of non-traditional financing that sits between senior debt and equity. Mezzanine financing is a hybrid of debt and equity financing that allows business owners to borrow a larger chunk of their capital needs than a traditional loan.
When a business is looking for a significant amount of capital for a mega project or acquisition, traditional loans may not be able to help. But mezzanine financing may be the way to go. However, mezzanine capital can be complicated and the options offered by mezzanine finance providers vary a great deal.
This type of financing is more suited to established businesses with ambitious growth plans, mergers and acquisitions, private equity buyouts, and real estate developments rather than new start-ups. Mezzanine lenders look for evidence of years of growth, sustainable operating profits and a robust business proposal/project summary, including a general valuation of the real estate.
Why Should You Use Mezzanine Financing?
Here a some of the advantages/reasons to consider mezzanine financing:
- Mezzanine debt is treated like equity, but the interest is tax-deductible.
- It is more manageable than other debt structures.
- May help you grow without giving up equity.
- Mezzanine finance can lead to eventual increased access to traditional bank debt financing.
- Allows you to improve your ROI and decrease your initial investment.
- Improves other loan terms and conditions.
- The value of the shareholder's stock increases with the use of mezzanine financing.
Disadvantage of Mezzanine Financing
The first and the foremost disadvantage is, it is very expensive as compared to the other traditional or senior debt arrangements. And with the default of payment, the mezzanine lender can dilute the equity in the company. Borrowers may have to sacrifice control due to loss of equity and may face significant debts and other consequences if things don't work out as planned.