Mezzanine Financing

 

Mezzanine financing is a hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically a form of debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. This kind of loan is normally subordinated debt provided by senior lenders such as banks and venture capital companies.

Since mezzanine financing is usually provided to the borrower very quickly with less due diligence on the part of the lender and little or no collateral on the part of the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20-30% apr range.

Mezzanine financing can be attractive even with higher interest rates because it is treated like equity on a company's balance sheet and may make it easier to obtain standard bank financing. To attract and obtain mezzanine financing, a company usually must demonstrate a solid track record in the industry with an established reputation and product, a history of profitability and a viable expansion plan and forecast for the business.

You should consider the following as you seek a mezzanine financial partner.

Industry experience - Choose a funder who understands your industry and will not jump ship when things get outside the typical comfort zone for the mezzanine lender.

Responsiveness - Look for a funding source that listens to your needs and responds quickly. A mezzanine partner that takes too long to make decisions will cost you in the future in terms of missed opportunities. A slow response may be an alert that they have a lack of understanding of your funding needs.

Reasonable cost - The cost of the financing needs to be measured against how much it allows you to expand and achieve company goals. A lower cost capital facility that doesn’t give you enough capital may not be a great deal if it does not provide room for expansion and growth.

Corporate fit – Your mezzanine lender will be your partner for a period of time, and as such you should pick a group you get along with for the duration of the capital facility.  Perform background checks and make sure your dealing with a reputable firm. 

Mezzanine financing is not the best fit for every business, but if you do not have enough collateral to provide traditional lenders and have solid growth potential it can provide expansion capital without giving up much equity.  Once your business has expanded and can qualify for bank financing you can move to a bank loan and pay off the mezzanine lender.

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