Mezzanine financing is a type of capital resource that sits between senior debt and equity. It’s a way for companies to acquire capital that would’ve otherwise been difficult to acquire on a senior basis.
It’s the last resort for companies to raise capital without selling a major stake. It can be used to achieve goals like growth opportunities and shareholder activities that require more capital than what senior management can put forth. Mezzanine financing can be seen from two perspectives; high debt or low equity.
It carries a higher interest rate than other forms of loan, but it’s also more patient. This means that it’s a long-term source of capital with a final maturity of up to seven to eight years. Plus, the returns are much higher, ranging from 12 percent to 20 percent each year.
Furthermore, mezzanine financing is an excellent way for companies to pursue growth opportunities and execute a management transition in a way that permits existing stakeholders to increase their ownership.
Some Uses of Mezzanine Financing
If senior debt is not enough, companies can turn to mezzanine financing to fill the gap. As mentioned above, it’s a patient capital resource that aids businesses in achieving their goals.
Mezzanine financing allows companies to facilitate various transactions, including:
- Growth Capital
- Shareholder buyouts
- Leveraged buyouts
- Management buyouts
The Advantages of Mezzanine Financing
- Mezzanine financing provides more flexibility in terms of less amortization and fewer restrictions, as compared to conventional bank loans.
- It allows companies to achieve growth opportunities that require capital being what the senior management can extend.
- The owner can retain major control of the business, like controlling the board and management, etc.
- It’s an affordable and less dilutive option than direct equity issuance.
- An easily accessible alternative for companies in the absence of senior debt and equity
- A patient capital resource, with interest for up to seven or eight years and no amortization
- Mezzanine supports long-term growth.
- There are fewer control restrictions in mezzanine financing.
The Disadvantages of Mezzanine Financing
- A more costly option compared to senior debt as more interest needs to be paid.
- May involve some equity dilution
- A risky option for the lenders in case of bankruptcy
Looking For Mezzanine Financing?
Contact them for more details.