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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