What is Mezzanine Financing?
There are a lot of terms thrown around in relation to debt and financing and quite frankly, if you’re not “in the know” these terms can be extremely confusing. Like mezzanine financing, for example. What is it and what does the term even mean? We’re going to explain this term in an easy to understand manner and help you grasp some financial information that might be beneficial to you, if you’re in the market to apply for a business loan.
In simple terms, mezzanine debt is what a company that has a positive cash flow uses to fund further growth through buyouts, acquisitions, expansion projects or recapitalization. This type of debt has been around for more than 30 years, however it’s only recently started to gain attention.
Some companies don’t prefer to utilize mezzanine financing, particularly ones that are family-owned, because of a reluctance to relinquish a certain amount of ownership. However, a lender’s goal isn’t to be a shareholder over a long period of time, but rather to gain a target return rate within a specific timeframe. As a business owner, having mezzanine debt can actually help your company get more total overall capital and avoid the small business drawback of being undercapitalized.
It’s true that mezzanine debt is more expensive than a bank debt, but it’s not as strict. Mezzanine lending is more flexible than traditional lending as it requires little to no collateral on the part of the borrower, and it’s generally more aggressively priced, with a lender seeking a 20-30% return rate.
Most financial institutions and banks only lend money based on the cash flow a business has. In many instances, the business’s actual cash flow won’t sustain what they are trying to achieve, making traditional loans and debt financing very difficult to attain. In the past, many businesses sought out equity investors as an alternative financing option, however, equity can be the most costly type of capital because of the fact that ownership in the company must be traded for it.
What mezzanine financing does is let a business owner to get the money needed, while giving up very little to no actual ownership of the business, so long as they are able to repay the loan in a timely manner. This type of financing is treated just like actual equity on a business’ balance sheet and it lets them get traditional financing more easily.
In order to qualify for mezzanine financing, a company has to have a solid track record of performance in the industry, be well established and have an excellent reputation. Additionally, lenders will usually need a history of the company’s profitability to feel confident they will be able to get the return they seek. Also, a Texas lender might require a detailed description of how the money will be used to generate more revenue for the company and repay the debt.
For companies that are seeking to expand, mezzanine financing can be the ideal way to accomplish this goal. In any financing situation, mezzanine financing is an alternative option that should be considered carefully. It may be exactly what your company needs.
As with any type of lending you are thinking about, the company you use must be carefully deliberated. Using the wrong company could spell financial disaster for your business, so you’ll need one that will give you the personalized attention and interest you require. If you are interested in finding out if mezzanine financing could work for your business, please contact a lender near you today for more information and to have any of your questions answered.