Mezzanine Financing

Key Highlights

• A hybrid form of funding that blends elements of both debt and equity, offering flexibility for businesses and investors alike.

• It’s like a loan that doesn’t require collateral and sits below regular bank loans in priority, but above company shares.

What is Mezzanine Financing?

A hybrid form of funding that blends elements of both debt and equity, offering flexibility for businesses and investors alike. It’s like a loan that doesn’t require collateral and sits below regular bank loans in priority, but above company shares. If the company can’t pay back, mezzanine lenders get paid after banks but before shareholders.

Key Points

• Hybrid Nature: Acts like a loan with interest payments, but may include options to own part of the company (like shares).

• Higher Risk, Higher Cost: Riskier than bank loans, so interest rates are steep (12%-20% or more).

• Equity Option: Lenders might get a chance to convert their loan into company shares, giving them a slice of future profits.

• Flexible Payments: Payments often align with the company’s cash flow, with a big final payment at the end.

• No Personal Risk: Business owners usually don’t have to personally guarantee the loan.

• Tax Benefit: Interest payments can often reduce the company’s taxes.

Common Uses

• Funding growth, buying another business, or supporting a management buyout.

• Best for established businesses with solid cash flow, not startups.

Example

A growing business wants to buy a rival but doesn’t have enough cash. It uses mezzanine financing to fill the gap between a bank loan and selling shares, keeping more control while getting the funds needed.