If your business is having difficulty obtaining financing, it might be time for you to consider mezzanine financing. Here is everything you need to know about mezzanine financing:
What Is a Mezzanine Loan?
A mezzanine loan is one non-traditional way of obtaining financing that works by combining debt and equity for borrowers. Usually, the lender will provide a subordinated loan that will receive some equity interests. Mezzanine loans have become increasingly popular in the last couple of years, and part of that is because there are times where a business will need a significant amount of financing for an acquisition or a project but cannot receive all of the financing from a traditional lender. This is where a mezzanine lender comes in.
How a Mezzanine Loan Works
This loan is a hybrid of debt and equity, and mezzanine lenders usually will only work with a company that has a proven track record. Entrepreneurs will often utilize a mezzanine loan to either purchase an existing business or to expand operations on their own business.
Mezzanine Loan Interest and Repayment
The main drawback of mezzanine loans is that they are normally higher than traditional financing. You will often encounter interest rates in the double digits, and lenders will often require some equity exposure to supplement their interest income on the loan.
Pros and Cons of Mezzanine Loans for Borrowers
Some of the advantages of a mezzanine loan for borrowers would include solid access to capital, the ability to minimize equity dilution, deductible interest payments, multiple options for repayment, and a solid benefits capital structure. However, some of the cons of this type of financing would include more serious financial consequences, the risk of equity loss, and the drawback of shared control with lenders.
Pros and Cons of Mezzanine Loans For Lenders
Like borrowers, lenders also have their fair share of pros and cons if they decide to engage in mezzanine loans. First of all, they can enjoy the advantages of interest income and equity, and participation. However, some of the cons would include a higher risk of default from your borrowers and lower seniority.
Whether you are a borrower or a lender, mezzanine loans are definitely something worth researching and looking into.