Mezzanine financing is an option for business owners who need additional capital but have reached their limits with senior lenders. The business can then seek more capital through subordinate lenders, called mezzanine lenders. These groups are usually mutual funds, private equity groups or private lenders who are willing to take a second seat to other loans. This means, in case of bankruptcy, they will be the last to be repaid. However, both borrowers and lenders can benefit from mezzanine finance if it is well-structured.
Increase Loan Limits
The main reason business owners seek mezzanine loans is to increase the limits on their loans. A senior lender will typically limit the amount of financing based on collateral or a business's credit score. A mezzanine lender is more likely to consider the business model of a new venture or expansion venture. If the mezzanine lender determines the business has a good chance of a high amount of future profits, the lender may extend financing even if that business has poor credit. Mezzanine lenders do this because they receive equity in exchange for their funds. They essentially have a stake in the business's success, and they want to give the business every chance to succeed as a result. You can expand your limits significantly through this alternative means.
Improve Balance Sheet
No collateral is used to secure a mezzanine loan. This means you will have a significant positive event on your income stream without losing a single penny on your expense stream. As a business, your asset to debt ratio is even more important than those of households. Your board of directors, other investors or even companies considering acquiring your business in the future will look at this balance sheet to determine how stable you are financially. Equity financing allows you to simply add assets to your balance sheet without compromising anything. It appears as additional capital for your business. Your senior lenders may even consider raising your limits after they view this new influx of capital.
Some business owners are tentative to accept a mezzanine loan because they are handing over some equity in their company. With this equity, business owners may also be expected to surrender a small degree of control. The new "partners" may ask for a vote on the board or a say in how things are run. However, business owners can benefit from this change just as much as they suffer from it.
If you work with the right mezzanine lender, you will be gaining valuable expertise. These lenders have been investing in businesses for years, and they may even specialize in your industry. It is important to work with someone who is familiar with your industry for this reason. Ensure they are adding something to your business instead of just getting in the way. Ultimately, if you feel comfortable with the relationship and value the input of your investor, you will continue to benefit down the line.