The Basics of Mezzanine Financing

So you’ve got the ‘billion dollar expansion idea’ for your company.  Now it’s time for you to raise the capital before you begin.  Determining which method of financing you are going to pursue is nearly as important as the business itself.  Certain amount of research is necessary to ensure you are picking the finance option that works best for you and your business.

It’s nearly impossible to talk about mezzanine financing without first touching on the basics of debt and equity financing.  The reason for this is due to the hybrid nature of mezzanine.

 
In basic form, mezzanine financing is essentially debt capital that can be turned into equity capital.  Here are a few definitions to consider when thinking about this hybrid:

Debt capital: Basically a loan.  The borrower will be given money from a lending agency with an agreement to eventually pay it back.

Equity capital: A financial exchange.  The lender will give capital on the basis that it will be exchanged for ownership or stock in the business.

Mix those two definitions up and you will have a good idea what mezzanine financing consists of.  This type of capital starts off as debt capital, however if a loan is not paid back in full, or on time, the lender has the rights to convert their investment into equity capital.

 
These aggressively priced loans are a great way to finance if a quick cash flow is needed.  The main risk relies on the lender, who is given either little or no collateral.  This type of loan is also typically subordinated, which further explains the amount of return that the lenders generally seek. 
When sifting through the financing options, keep in mind the time frame you need the money, the return you are willing to give up, and the amount of risk you are willing to take.  These components vary greatly from option to option, and may be a deal breaker when choosing financing.

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Getting Into the Green: Avoiding Business Debt

When you are running a business, the one thing you want to do your best to avoid is business debt.  While having business debt isn’t always a bad thing, it is important to get ahead of it to ensure the debt does not continue to grow. If your company has too much debt, it can lead to many bad things such as; you start borrowing too much, you start cutting into your revenues, you no longer have money left to pay any bills, and you even have the possibility of going bankrupt.

When trying to reduce business debt, one of the first things you can do is contact your suppliers. Having a strong business-to-business relationship with a supplier will make them more apt to the possibility of negotiating a payment plan out. Next, you need to find a way to increase revenue. If you have a product that is highly demanded, maybe try raising the price a bit and see if that helps decrease the deficit.

 

After those steps are done, consider restructuring the business. Raise some money in ways other than just the business. If you have a bunch of unused equipment sitting around the business, sell it off.  All those extra supplies that you probably won’t need could be sold too. Another good step would be to reduce operating expenses. Be more aware of how much energy and water you use and try to limit them.

Lastly, you need to raise more capital. There are many ways to go about raising capital for a business. Try and find some investors in the company and use their money to settle debts. Let them know what the money is being used for and explain to them how this will help the company get ahead and begin its growth. There are many good, useful tips for ways to lower your business debt so make sure to do plenty of research and even contact a professional to help you make the right decision for your business.

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ACT: Helping Finance Your Business

While American Corporate Turnaround does a lot of debt restructuring, they also work with many different lenders for financing your business as well. Check out the following options to see if any are right for you.

One way ACT offers financing is with account receivable factoring. This is when you would sell your account receivables to others at a discounted rate in exchange for immediate cash. If you are in a hurry to get a certain amount of cash but can’t wait for the person who owes you to pay it, this is a very good option.

Another option is merchant cash advance. This is very similar to a receivable factoring in the sense that you get immediate payment. The difference between the two is that you are agreeing to pay the third party a percentage of future sales instead of selling sales that already occurred.

Next, there is equipment leasing.  Equipment leasing is a good option because there is a low out of pocket expense involved. Everything can be included in the lease and this frees up your money for you.

Asset based financing is also a good way to finance a company. This provides working capital that is secured by the company’s assets.

Last is purchase order financing. This is done when a distributor doesn’t have the funds to pay the manufacturer but does have a purchase order that needs to be filled. A purchase order company would pay the manufacturer to complete the order then collects payment from the buyers. The company would then take their fee before releasing the funds to the distributor.

American Corporate Turnaround has many great options for assisting you in financing your business. Let us help out and see if we can help make your business grow.