More often than not, financial tools like business loans, for instance, are quite easy to understand. What we mean by this is that, with minimal knowledge, you kind of figure out how they work.
However, sometimes, you stumble upon some obscure concepts you’ve never heard of. This is the case of the less “user-friendly,” so to speak, “Mezzanine financing.” Ask somebody what that means, and they’ll say something like: “It’s financing for some prescription drug, isn’t it?”
Mezzanine financing, although it sounds alien, is a fairly simple concept, and in the remainder of this article, you’ll learn everything about it. You probably know it already, but not under this denomination.
What Is Mezzanine financing?
When business owners want to expand their companies or simply make them grow, they have two methods of financing they think of immediately: debt (in the form of business loans) or equity.
With all these, if you’ve got a lack of equity or no collateral in your company, you can kiss your funding goodbye. What can you do, then? You still need your financing.
In this case, you need to take your eyes off traditional financing methods like business loans and look at the more unusual ones, like mezzanine financing.
What is this?
- Mezzanine financing is, simply put, a method of funding that stems out of a combination of debt and equity. Keep in mind that we’re talking about “Senior” debt here. This is that debt that has the highest priority. This means that it’s the one you’ll have to repay first.
In order to get Mezzanine financing, you must have a good cash flow in your company. Maybe that doesn’t apply to business loans, but it’s a whole new situation with this type of financing.
So, to reiterate: when you get Mezzanine financing, you get a mixture of equity and Senior debt. You’ll get a certain sum of money against the value of your company in the future. Of course, interest is added, as well.
The Advantages of Mezzanine Financing
- The lender does not interfere in any way with your company
This is great news for those business owners who can’t stand to be told what to do with their companies. With Mezzanine financing, you can rest assured no one will have a shred of interest in that road you’re taking your company on, as long as you pay up the debt.
- Great repayment plans
Usually, Mezzanine financing requires paying up the debt towards the end of the term, which basically means that you’ll be worry-free for a good portion of time after taking out the financing.
- It provides huge capital
Mezzanine financing leads the way to gigantic sums of money, which ensures that your company will grow to unprecedented heights. Of course, for this to happen, you need to be a good leader and to have a deep knowledge of the market you’re activating in.
Moreover, traditional business loans are nowhere near Mezzanine financing when it comes to the sum a business owner is able to get.
- You get assistance and consulting
Mezzanine financing is a great deal, but also incredibly complex. The lenders will always make sure you’ve understood the terms. What’s more, they will always have advice for you. They can help you create strategies you didn’t think of before.
The Cons
- High costs
Mezzanine financing is fabulous and all that, but it is highly regarded as one of the most dangerous and riskiest methods of funding. First of all, the costs are considerably higher than those of other methods. You’ll be paying up in the end, however.
- It’s difficult to get
Due to the size of Mezzanine financing and all the strings attached to it, lenders are incredibly picky about the people they grant it to. You will need to go through extensive processes, and you might not qualify even then.
Our piece of advice for you is to read more on this topic. At least you’ll know what to do to get your hand on Mezzanine financing. Please feel free to contact us and ask what the requirements are and how you can increase your chances of getting it.
- Possible restrictions on spending
This doesn’t apply in all cases, that’s why we chose to say “possible.” The lender might decide to control a portion of cash-flow, to make sure you’re not spending your money (his money, really), recklessly.
If you can get business loans, do so, but if you need a bigger type of financing, consider the Mezzanine one. You’ll benefit from all the perks affiliated with it. Pay attention to the pitfalls in the meantime.
Consult some specialists before diving headfirst into it. It looks tempting, but all disasters start with something like this. Don’t take hasty decisions, because you might end up musing how it could have been if you gave yourself the time to take an informed one.
