Mezzanine financing is a non-traditional form of funding which generally involves some hybrid of money-lending and a provision of equity extended by the borrower. One of the most common types of mezzanine financing occurs when a borrower is loaned an amount of money at a specific interest rate, but some portion of the repayment amount is also in the form of equity. Mezzanine financing typically carries a rate higher than the prime interest rate, and will generally involve a period of time between four and eight years.
Advantages of Mezzanine Financing
In most cases, the owner does not lose control of his/her company, and there is seldom any real interference from the mezzanine lender. There’s a great deal of flexibility in preparing amortization schedules and repayment terms. For the most part, mezzanine lenders tend to be long-term investors who can be relied upon to be fair and honest. These lenders can often provide useful strategic assistance when it is needed. Probably the biggest advantage of mezzanine financing is that it provides capital to a business owner when it is most needed, generally to expand production or to acquire another business.
Disadvantages of Mezzanine Financing
There are situations where a business owner might lose some control of his operation if projections don’t work out as planned, or if a large share of equity is offered to the mezzanine lender. It’s also true that some mezzanine lenders require strict conditions for their loans, for instance, that the borrower take no other loans out, or that a specific cash flow to equity ratio be maintained. Sometimes business owners who agree to mezzanine financing are obliged to tolerate restrictions in how the money would be used. From the borrower’s point of view, mezzanine financing is generally more expensive than traditional lending arrangements would normally be.
Want to Learn More About Mezzanine Financing?
If so, we would be glad to discuss the characteristics of mezzanine financing, and how you could benefit from it. Contact us at Lighthouse Capital so we can provide you with all the information you need.