As an alternative to traditional bank loans, mezzanine financing can have some unique advantages. If a business needs to borrow money to expand or continue functioning, it is important that all the options are researched and the best course of action is taken. This particular type of financing is usually most appealing for businesses that are trying to expand, but it can also be very beneficial in other situations.
The main difference between a mezzanine loan and a standard loan is that the lender can claim ownership of a portion of the company if the loan is not repaid according to the financing agreement. If the borrower does default on the payment, the lender will assume shares equal to the outstanding balance. Then the share can be sold or transferred at the lender’s digression.
Mezzanine financing is advantageous because, as long as the loan is paid, the client will give up none or very little ownership and will not have to offer any collateral. This makes mezzanine loans far more flexible than normal loans. The conditions can usually be tailored to the borrower’s exact needs and tend to allow easier alterations to the agreement. Additionally, since a mezzanine loan is treated like equity, other financing options can be utilized at the same time.
Remember that no one type of financing can be optimized for every circumstance. The biggest disadvantage mezzanine financing has is its price. The lender is assuming far more risk than in a traditional loan, so the interest rates are usually slightly higher and the terms can be stricter. Moreover, mezzanine loans usually involve a return of at least 20%. Often times, the benefits can outweigh the slightly higher expenses but that is not always the case. This type of loan should be carefully considered.
Keep in mind that mezzanine loans can have high criteria. Because of the extra risk to the lender, qualifying companies must prove that they have steady profits and a high credit rating. A good track record and a solid plan for how the capital will be used are also advisable. Despite this, mezzanine loans can be acquired much faster than normal loans. Again, because they are treated as equity, they can be received in just a few days and with little to no paperwork.
It is common for a business to have the need to borrow money every once in a while. There are a lot of options in today’s economic world, each with their own benefits. Mezzanine financing is only one of the many choices every company has. Carefully consider if it is the right course of action for your business.