Mezzanine financing offers a way for publicly and privately held companies to attain financing without going public and potentially ceding ownership of their company. It is a blend of traditional debt financing and equity financing, reaping some benefits of both.
Like equity financing, mezzanine financing is an unsecured debt, requiring no collateral to be put up unlike traditional bank loans. Like debt financing, mezzanine financing is very fluid and does not necessarily involve giving up an interest in the company.
A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically 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. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.
Since mezzanine financing is usually provided to the borrower very quickly with little 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% range.
Mezzanine financing is advantageous because it is treated like equity on a company's balance sheet and may make it easier to obtain standard bank financing. To attract mezzanine financing, a company usually must demonstrate a track record in the industry with an established reputation and product, a history of profitability and a viable expansion plan for the business (e.g. expansions, acquisitions, IPO).
Mezzanine financing is a particularly appealing form of liquidity for owners of privately held companies. It is traditionally understood that a privately held company simply cannot achieve the same sort of fluid capital flow as a publicly held company, but mezzanine financing offers a way to balance that situation without going public.
In addition to the fact that mezzanine financers do not retain an interest in the company except in the event of a default, there is also the important consideration that they actively do not want an interest in the company.
While traditional equity investors are often striving towards some level of control, a displeasing thought to many private owners, with mezzanine financing one can rest assured that the financers will do what they can to ensure you pay off your debt without resorting to default.
A company must demonstrate an established track record in its industry, show a profit or at the very least post no loss, and have a strong business plan for future expansion. Because of these limitations, mezzanine financing is not for every business.
For businesses looking for a quick injection of capital to grow their already successful business, without giving up an interest, mezzanine financing can be an ideal solution.
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