What Mezzanine Financing is All About

As everyone who has ever taken a business class knows, you have got to spend money to make money.  You try to help your company grow but sometimes you are not able to obtain sufficient funds to help your business grow.  Many times a company will go to a bank to obtain a loan but if you do not have the collateral to back it up, it will not be approved.  One way to solve this problem is through mezzanine financing. 

Mezzanine financing consist of a hybrid mixture of debt financing along with equity financing.  In mezzanine financing, the company receives an unsecured loan from the lender.  In return for the loan, the lender will able to convert his loan into a stake in the company should the loan be defaulted upon.  Since they are done rather quickly and there is no form of collateral for the lender, the loans do typically carry a very aggressive interest rate of around 20-40%. 

There are many ways to obtain mezzanine financing.  A good source to start looking at is private investors.  Mezzanine financing appeals to private investors because of the high interest rate that will be paid back to them and the possibility of obtaining a stake in the company should they not be repaid as agreed to. 

Though it seems simple, not all companies looking for mezzanine financing will be able to get it.  First, the company looking for mezzanine financing needs to have a good track record of repaying lenders.  They also must have a solid plan for expansion or at the very least, company growth.  The company must also have an established product and steady business.  Last, the company must have a history of obtaining a profit. 

Mezzanine financing is a great way to raise money quickly for company expansion.  If you and your business are looking to raise money, let American Corporate Turnaround help you out. 

What is Mezzanine Financing and its advantages?

Mezzanine Financing Can Help Your Business With These Simple Steps

 

There is one core essential to every successful business and that is working capital. Working capital is a term used to describe cash or easily liquid-ready assets that is available to a business or entity for use. Without working capital a business can quickly become dead in the water.

What Are The Different Means To Get Working Capital

To ensure you have money in the bank for bills, inventory and payroll among other areas of accounts payable, you have a few areas to get working capital from.

·         Cash revenue

·         Investment dividends

·         Loans and financing

Where Does Mezzanine Financing Stand In The Capital Department

Commonly called ‘Mezz’ financing, the strategy is available for publically traded companies as well as businesses that are held privately. For the most part this type of financing offers both the features of equity (warrants/options) and debt (principal and interest payments). It is better ranked than previous debt but less than holders of equity as far as security goes.

Some of the common uses for Mezz financing are:

·         Buyouts of management

·         Recapitalizations

·         Acquisitions

·         Leveraged buy outs

·         expansions

Elements Of Mezzanine Financing

There are a few elements you’ll want to become familiar with when considering this kind of financing. The first is payment in kind interest (PIK). This means there will be an amount of stated interest that is added to the principal on a periodic basis. This is generally paid back in a lump sum or bullet installment at the end of the loan.  You will also want to familiarize yourself with cash interest. This is when Mezzanine financing looks most similar to traditional debt; you will have regular payments that include interest.  Finally, there is the ownership option. In this instance the lender receives the warrant or option to change to equity. For the most part in smaller companies this will be purchased back over time.

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.