Mezzanine financing – Bridging financial gaps
Mezzanine financing gives businesses access to capital when a bank won’t finance them initially. It is an excellent method for a new, but profitable company to gain capital while getting their financials in better order so they can receive a more standard bank loan.
It generally includes subordinated convertible debt and yield-based preferred shares, often structured with warrants or options. Basically, mezzanine financing is a combination of both debt and equity financing. The financing starts off as a debt loan, and the lender can take over an equity ownership position if the loan is not paid back in full, or on schedule.
Little collateral is required up front for this type of financing, and also the turnaround time to get the loan is rather quick. The problem with this sort of financing is that the interest rate on the loan is rather high, and sometimes can be between 20 and 30 percent. For this reason, it is best to not make this a long-term financing option but to use it briefly until you can obtain a larger loan.
Here are some common examples of mezzanine financing transactions:
• Management/leverage buyouts
• Expansion financings (internal growth and/or acquisitions)
• Recapitalizations and divestitures
Have a good plan in place for the lender you are approaching to help you get approved quicker. Make sure the lender knows as much as possible about your business model, so they can make a more informed decision on your business capital request.