How to Calculate Annual Interest Expense on Mezzanine Loan
A mezzanine loan is a form of financing a company can use to generate cash for expanding the business. The borrowing company provides the mezzanine lender with shares of the business in exchange for cash. Mezzanine loans are usually for $2 million or more because most mezzanine lenders do not want to deal with the plethora of paperwork for a small sum. Also, mezzanine lenders charge a high interest rate on the loans because of the risk involved. If the borrowing company goes bankrupt, the mezzanine lender may not receive full repayment because mezzanine loans are subordinate to other loans. A company must pay interest on a mezzanine loan on a monthly or quarterly basis, depending on the terms of the loan.
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Instructions
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Confirm the amount of the mezzanine loan. The loan amount indicates the amount of cash the company received from the mezzanine lender. Let’s assume a company borrowed $5 million to complete construction of a new facility.
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Verify the interest rate on the mezzanine loan. The interest rate of the mezzanine loan allows the company to calculate the cost of borrowing funds in this manner. Let’s say a company has to pay 22 percent interest on a $5 million mezzanine loan.
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Multiply the interest rate of the mezzanine loan by the amount of money borrowed. For instance, a company that borrows $5,000,000 with a 22 percent interest rate has an annual interest expense of $1.1 million. This means the company has to pay $1.1 million interest per year on the $5 million mezzanine loan.
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