Companies that require more money to fund an expansion may consider mezzanine financing. This financing option is a combination of equity and debt financing. While it may be a good financing option for some companies, the advantages and disadvantages of mezzanine financing should be noted.
Mezzanine financing is a way for companies to get financing. This option merges debt and equity financing. The business owner borrows money and then sells some of the company’s stock to the lenders. It is a good option for companies that have a decent amount of cash flow. While this form of financing requires not capital, the borrowers are required to show that they have viable cash flow. The debt the borrowers accrue in mezzanine financing is unsecured debt. The lenders involved in this type of financing tend to be more flexible. This flexibility extends to loan terms such as amortization and interest rates. These lenders act more as long-term investors rather than people looking to make large amounts of money rapidly. Sources of mezzanine financing include banks and insurance companies.There are several benefits to mezzanine funding. Borrows never lose complete control of their company. This funding option helps to increase the value of the stock held by current stock holders. Also, these lenders can add valuable insight and ideas to help improve the operations of the company. The lenders are also successful in business and have the knowledge to provide the borrower with strategic information.
Mezzanine funding does have its disadvantages. Lenders can request restrictive covenants. These covenants can include stipulations that limit the borrower’s ability to borrow more money from other funding sources or create additional security using the borrowing company’s assets. This lending option tends to be more expensive than traditional funding. Sometimes the interest on these loans is as high as 20 to 30%.
Businesses that need to increase their financing should consider mezzanine funding. It is a quick and effective way for existing business to secure additional money. The advantages and disadvantages should be considered when selecting this financing option.
