Last Updated on 13th October 2020
Mezzanine finance certainly isn’t a simple and straightforward type of commercial finance. Whilst being a hybrid of equity and debt, mezzanine finance can be a great tool for funding large business projects, buyouts and business expansion. In essence, mezzanine funding is a business loan with a twist.
If you have a business and need finance, the standard options available are either by taking a business loan or by selling equity in the form of shares. Mezzanine finance sits in between both of these options and can be a more viable form of raising funds in certain situations.
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What is mezzanine finance?
Mezzanine finance is a complex form of finance, so we’ll try our best to explain. A mezzanine loan is a business loan which is borrowed against the business and more importantly, the equity in the business. Mezzanine loans are also often time-sensitive. What this means is, if the loan or part of the loan isn’t paid back within a certain period of time, then the lender receives a share of the business equity in return. This is all agreed beforehand, so you may have to take a calculated risk.
This is beneficial for lenders and businesses, as businesses can keep on borrowing while lenders reap some the rewards of expansion. Finance can also be used in conjunction with a business loan. This can be particularly useful for when a business loan isn’t quite enough for what you propose to do. In essence, you could take a business loan for 50% of the funds, use 30% of funds from the business and then 20% mezzanine finance.
It’s also important to note that you’re not selling a share of your business in exchange for funds. With mezzanine finance, you can effectively borrow and then grow the business. If things don’t go to plan, lenders can then take shares in the business. The reason lenders do this, is to minimise their risk of losing capital.
Should I use mezzanine finance?
Let’s face it, the majority of business owners wouldn’t want to sell shares in their business to raise funds. Furthermore, a business loan may not be viable, due to the size of the loan that you need or simply because lenders deem the loan too high risk. In circumstances such as these, mezzanine finance could be ideal.
Mezzanine finance allows businesses to borrow large amounts, especially when compared to traditional business loans. The loan is then paid back through profits generated by the business, either as a lump sum or deferred payments. This is particularly useful for when you need a large influx of business funds and want to retain capital within the business. Mezzanine finance can also have tax benefits, whereas traditional routes to finance rarely do.
If you’re a director of a business and in need of surplus funds, speak to a specialist. Mezzanine finance isn’t something we advise business owners to try and arrange themselves. Often enough, mezzanine lenders may only offer products via brokers, simply because of the technicality involved with this type of finance.
Commercial finance is a varied field and mezzanine funding is just one product. There are other financial products available such as bridging, which may also be a viable option. By speaking to our specialists, they can provide you with the pros and cons of each type of finance and advise you on what’s best for your goals.