Guide to Mezzanine Financing
Just about every company require financing to get up and running. Traditionally, there are two types of financing: debt and equity. Equity financing is an investment in the ownership structure of the company. Debt financing is loans made to the company by investors or lending institutions such as banks. Sometimes there isn't enough traditional debt and equity financing to get a company up and running. This is where mezzanine financing comes in.
-
Overview of Mezzanine Financing
-
Mezzanine financing can be described as a blend of debt and equity financing. Mezzanine financing is typically given to a company that needs additional equity on its balance sheets to qualify for additional debt financing. The mezzanine financing appears like an equity investment on the balance sheet but it can be repaid to the lender as if it were a debt investment.
Debt and Equity Components of Mezzanine Financing
-
Mezzanine lenders demand very high rates of interest on their investments, typically 20 to 30 percent. Many borrowers try to pay this off as quickly as possible, but if it can't be repaid, the mezzanine investor has the right to convert debt investment into common shares of the company's equity. This conversion dilutes the ownership structure and create new owners who were previously creditors.
Usage of Mezzanine Financing
-
Mezzanine loans are typically issued very quickly to make deals happen at the last minute. Sometimes this financing is used to expand an existing enterprise, other times it is used to launch new ventures. Mezzanine loans typically don't require borrowers to post collateral against the loan because the lender can always convert debt to equity. Mezzanine loans are considered high-risk investments, thus they are not easy to obtain and command very high rates of interest.
-
