The Ins and Outs of Mezzanine Lending
The concept of Mezzanine lending tends to obscure the distinction between debt and equity. This form of financing is involves substantial risk but can generate significant returns if the venture is successful. It is rarely used as seed money for new businesses, but is often the choice of investors who want to invest in a company that has a track record of success.
The provider of mezzanine financing is often low on the totem pole when it comes to getting repaid, but the sky-high interest rates can compensate for this. Senior debt and senior subordinated debt will be the first to be paid back, but the advantage the issuer of mezzanine debt has it that he or she has a warrant to make the security equity if the loan is not repaid. In this case, mezzanine lending can be advantageous to someone who wants to have a part of the business and some control in how it is run. Mezzanine lenders tend to choose businesses that have a strong cash flow and a steady performance.
The mezzanine lender benefits from interest rates that can be as high as 20%. However, if the company fails and is not able to pay back the loan, the lender has to rely on the company getting a second lease on life, since it holds its stock. One advantage to the business owner is that that the lender can have a hand in helping turn a business around. This can be a disadvantage as well if a business owner wants a sense of autonomy.
Mezzanine financing provides advantages and disadvantages both to borrowers and lenders. It is usually chosen by business owners who want to make an acquisition or expand operations. This form of financing can offer flexibility in amortization and other details in repayment. If the company has confidence in the lender’s successes, the input of the lender in the running of the business may be welcome. The relationship between borrower and lender may resemble an investment partnership rather than just a credit versus debtor scenario.
The downside of mezzanine lending is that it can involve detailed agreements that may restrict the business owner’s ability to borrow more money, expand or deploy assets in certain ways. While the high interest on the debt can be tax deductible, it is still high. Applying for mezzanine financing can be long and complicated. However, there are enough advantages for both the borrower and lender, especially those who share a similar vision and are able to work towards similar investment goals.
For more help getting Mezzanine Financing, contact Wexum today at 512-646-0902.