What is a Mezzanine Loan?

A mezzanine loan is a type of loan that blends both equity and debt. Lenders are going to provide subordinated loans for the borrowers and they potentially get equity interests from this loan. When your business needs immediate funds for a significant project and business acquisition, you may find out that some traditional lenders are unwilling to provide all money you need. However, some creative financing options, such as mezzanine loans can help you get enough money for expanding your business. Many mezzanine loans usually have high-interest rates, but they have flexible repayment terms.

How do mezzanine loans work?

Mezzanine loans are a combination of both equity and debt. In the agreement, the borrower can agree to provide equity interest to the lenders. Many mezzanine lenders usually work with some companies with a good and successful track record. It is a good idea for you to use this mezzanine loan for acquiring an existing business or expanding your business that is already profitable.

Most mezzanine loans usually come with higher fees and costs than the other traditional types of loans that are available on the market. The interest rates of these mezzanine loans can reach double digits. The lenders may also ask for equity exposure as an addition to the interest income. 

Pros and Cons of Taking Mezzanine Loan

Pros

• Access to capital without diluting the equity

  This is the most important benefit that is offered by this loan. You can get instant money by borrowing this mezzanine loan for purchasing any business-related items or expanding your business. You can avoid trading a substantial amount of your equity for getting capital by taking this loan.

• Deductible expense

  If you are a business owner, you may want to look for some deductible expenses that can be included in your accounting book. Interest payments from the mezzanine loans can be included as the deductible expenses for your business. It can be a huge saving for your business when you want to grow and expand your business quickly.

• Good capital structure

  When you create your balance sheet for your business, you are going to place the mezzanine financing option as the equity. You can show a low debt level to other financing companies, especially when you want to take other types of financing. It can be a good way for you who want to improve the overall profile of your business in your balance sheet.

• Multiple repayment options

  This is another reason why many business owners want to take this mezzanine loan. Several repayment options are available today. It can create flexibility for borrowers who want to repay their loans. You can pay the interest charges by using cash, provide equity-like instruments, and also add the loan to the loan balance. You can discuss with the lenders when you want to know all the available repayment options.

Cons

• Risk of equity loss

  This is the risk that you have to face when you cannot repay the loan. When you default on this mezzanine loan, you may have to give equity interests to the lender. It means that you are going to reduce the total equity you have in your business. You have to minimize this risk by doing your best to keep your payment to the lenders every month.

• Strict control from the lenders

  Mezzanine lenders can set specific criteria that should be met by the borrowers. For example, the lenders can specify the limits on the financial ratios of your business. They can also make other demands for ensuring that they can get their money and the interest fees back to them. These lenders may be able to set conditions of your business operations.

After reading some pros and cons of this mezzanine loan, you can consider taking this loan for expanding or growing your business. It is a good idea for you to compare some available lenders before you decide to select the best loan provider for your needs. Make sure that you ask about the repayment periods and the monthly payments for repaying this loan. It can be a perfect type of business loan for you who want to grow your business with minimum equity dilution.

References

• https://www.investopedia.com/terms/m/mezzaninefinancing.asp

Last updated on 2022-01-05