The Definition of Mezzanine Capital
Existing companies that want to expand their operations may turn to mezzanine financing to help fund their expansion. According to Investopedia, an online knowledge base for investors, mezzanine financing is a hybrid of equity financing and debt that is particularly advantageous for existing companies.
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Function
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Companies in the mezzanine level---beyond the start-up phase, but before initial public offering---often use mezzanine capital to fund the last stage of operations before going public. It may help establish the floor price for the initial public offering, or IPO, according to FundingPost, a website that helps venture capitalists and angel investors find investments.
Repayment Terms
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Investors who offer mezzanine financing expect a quick return on their money. They often structure the loan to give them an ownership stake in the company if the loan is not paid back in full and on time. The typical expected return on mezzanine financing is in the range of 20 to 30 percent, according to Investopedia. In some cases, the investor expects repayment of the loan out of the proceeds from the IPO.
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Advantages
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A mezzanine loan typically does not require collateral. Since there are typically no inspections or other requirements of loans from more conventional lenders, the funds from mezzanine loans are available quickly. The company that receives the loan lists the funds as equity, which makes it easier to leverage more conventional financing.
Requirements
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Mezzanine funders typically look for companies that have a strong track record in their chosen business. The company should be profitable, or at least breaking even, according to the Minority Business Development Agency, and should have a viable expansion plan to attract mezzanine funding.
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References
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