A Guide to Mezzanine Debt and Financing
Small and mid-market businesses often have difficulty when it comes to securing debt financing. Since 2008, federal regulations have tightened. Which has led to banks and traditional lenders being hesitant to lend to smaller companies with inconsistent cash flow, a poor DTI, or insufficient collateral.
This has led to these mid-market businesses seeking alternative solutions, such as mezzanine financing to support acquisitions, growth, and such.
In this blog, we’ll explore mezzanine debt and financing and how it works.
What is it?
This is a type of financing that bridges the gap between equity and senior debt. It is sometimes referred to as subordinated debt and is a hybrid of debt and equity that is not completely backed by the value of the assets of the company. Mezzanine financing offers flexible terms and allows the borrower to finance unsecured, intangible assets.
It is based on historic and projected cash flow, which makes it a lot easier to attain for smaller companies than traditional funding.
How do Investors Benefit from Mezzanine Financing?
Mezzanine financing offers several benefits for investors. First of all, it provides a high return rate. In many cases, returns are between 12% and 20% annually.
The return on mezzanine financing is less variable than that with equity. The return on equity differs based on the current supply/demand trends, but the returns on mezzanine financing are established through a contract and will be paid in full.
Repayment terms of mezzanine financing are set at a fixed amount and are secured before the cash is paid out to the investors. This means that it’s less risky and there’s a buffer against the up and down nature of the market.
How do Borrowers Benefit from Mezzanine Financing?
Now that you know how investors benefit from mezzanine financing, let’s take a look at how borrowers benefit from it.
When they are seeking funding, a business owner often finds a gap between their senior debt and equity for a variety of reasons. Mezzanine financing allows companies to bridge this gap and secure the funding they need. Of course, there are some other benefits as well.
The immediate need for equity by a company is reduced. Which means the owner doesn’t lose their stake in the company. Since the lender doesn’t have any ownership in the enterprise, they are often long-term funding sources.
Mezzanine financing allows borrowers to achieve the best funding possible. Plus, it’s tax-deductible and banks are more likely to lend to a company with this financing included in the capital structure, as it reduces their risk.
A borrower will be able to achieve their business goals through flexible funding provided by mezzanine lenders.
In today’s world, with banks increasing restrictions on lending, mezzanine financing is a great alternative for borrowers. It’s one of the most flexible options that a borrower can access.
If you want to learn more about how mezzanine financing could benefit your business, contact Masters Commercial Capital Group today. We’ll be happy to help you gain a better understanding of this alternative to traditional financing.