Mezzanine financing

Mezzanine financing named for its place in the capital structure, is a hybrid of debt and equity financing. Lender gives you a loan and if everything works out the company simply pays to loan back under already fixed terms. The truth is that large percent of new businesses fail so lender has the right to convert their loan into an ownership percentage or equity interest. This allows lender to have a claim to any future profit and protect himself in case of default. On the other hand mezzanine capital enables owner to keep full ownership as long as business is lucrative. It can also be used to persuade reluctant investor who sees your venture as a high risk by offering him mezzanine arrangement.

If business fails to pay the loan lender is generally paid after venture capital companies and senior lenders are paid. Mezzanine financing is also offered to business with established reputation and products and history of profitability where process is completed with little due diligence and collateral. On company's balance sheet it is represented under equity. Interest rate for mezzanine capital is usually between 12% and 20% which makes it high risk and potentially high return debt form, but the good news for borrowers is that it is tax deductible.

Mezzanine financing is not viewed as permanent capital but solution oriented capital that serves specific purpose and can later be replaced with senior debt. Senior debt is debt that takes priority over other unsecured junior debt. Mezzanine is often viewed as expensive debt or cheap equity. It carries higher interest rate than senior debt but it is less expensive than equity in terms of cost of capital. It is also more patient than senior debt which gives business needed time to grow and build capacity for refinancing mezzanine capital. Mezzanine financing is a way for companies to grow faster than they could otherwise with senior basis alone.

Both types of financing have its advantages and disadvantages. Especially small business owners must be familiar with all forms of financing, how they work, why is one better than another and which one works best for their business. At Mina Mar Group we can help you with all sorts of funding from private equity and mezzanine to venture capital, debt, IPO and much more. We will guide you every step of the way from first steps until you reach your goal.

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