It is apparent as an entrepreneur you will want to expand your business, earn more revenues and more profits. To increase your business you need machinery, raw material, and plant. If you are thinking to invest in the plant and machinery or thinking to launch a new product but you are handicapped due to lack of finance, then getting the funds through mezzanine financing is the perfect option. They are one of the great alternatives to bypass the equity funding and bank debts. They are the bridge between commercial lending and financing through equity and sits between them.
In simple words, Mezzanine financing is a hybrid of debt and equity financing. It is mostly used as a way to finance the expansion costs by companies. Mezzanine financing requires timely payments on the loan. In case of failure the lender is entitled to ownership of the company or equity interest in the company. Most mezzanine loans are given with little or paperwork and collateral, thus interest rates of this finance are usually higher than traditional loans. These loans have many pros that are discussed below.
- Mezzanine Financing Is Done Looking at The Cash Flows: The financer looks only at the cash flow aspect and does not bother about the collateral. They are an alternative source of funding when banks and other financial institutions turn down the loan application due to lack of collateral security.
- Flexible: The Mezzanine financing lenders are more flexible, as one does not need to pay the principal amount immediately. Only the interest needs to be paid, and the principal amount that balloons up need to be paid on maturity allowing the borrower to invest freely for expansion without the tensions of repayments.
- Cheaper Option and Hassle-Free Than Equity: This form of business financing is much less expensive than raising funds through investment from the markets. The pricing of mezzanine funding is less costly than to take funds from venture capitals or private equity funds.
- Gives More Extended Period to Pay Back: The financers provide a long-term option for repayment while lending and the maturity can extend up to five years and even more, therefore it works as capital and not a bridging loan.
- No Need to Change Owners: Unlike funding through equity investments where the ownership and the control often changes, the existing owners can stay on the board, and the shareholders have the authority.
- Easy Availability to Meet the Challenges: Mezzanine financing helps to fund the rapid growth of the company to take advantage of the favorable market conditions, acquiring new assets, buying out some other existing partners and management buyouts. They are perfect for business that caters to the service sector as only the cash flow of the company is gauged by the lenders, and nothing else is reckoned.
- Allows Growth without the Help of the Banks: They are perfect to bypass the banks and get quick credits and grow the business at a rapid pace which otherwise would have been delayed in the loans were taken from the banks that need lots of documentation and verifications for sanctioning, and the market opportunity is lost.
To qualify for mezzanine financing, a company requires a strong track record in the industry. It should be well established with a good reputation. Companies might have to present a history of profitability to the lenders Depending on the business and market situation one must decide for the nature of financial backup. If there is no collateral security and the loans are required without delay, then going for mezzanine financing is the best option.