Mezzanine Finance

Mezzanine funding through non-bank lenders

While typically not the first financing option, mezzanine financing is another way growing and established companies alike can obtain the financing to help their businesses expand, especially in today’s increasingly cautious lending environment.

Mezzanine financing is a debt/equity hybrid capital structure. Usually running on 5 to 6-year cycle with interest accruing for only the first three years, lenders offer financing at relatively high interest rates (anywhere from 12% to 30%) but under a unique set of conditions. In the case of mezzanine financing, there is an agreement that debts not paid back within the terms of the loan convert to ownership or equity interest in the company. Yet, despite the high stakes, for some companies, mezzanine financing is a highly recommended financing option.

Benefits and Risks of Mezzanine Financing

The primary benefit of mezzanine financing is that it can provide 100% of the capital required to finance an acquisition or owner buy-out. Mezzanine loans are usually at least 3 million and lenders often place no ceiling on loan amounts. In contrast to other types of financing options, mezzanine loans are also generally easier to acquire, because they are unsecured by assets. In addition, mezzanine loans are non-amortizing. While interest must be paid down on a regularly basis, then, there is no obligation to pay down the principle during the loan period, which can free businesses up to move increased cash flow to senior loans and other initiatives. Another key difference between mezzanine loans and traditional bank loans is that mezzanine lenders are typically more flexible than traditional lenders when it comes to customizing their investment to meet individual financial, operating and cash flow requirements. Finally, there is the length of loan term. Compared to the typically two- to three-year terms offered by traditional banks, mezzanine lenders generally run on a five- to six-year cycle, which is a key factor for businesses looking to execute a major expansion.

The primary risks associated with mezzanine loans are their higher-than-average interest rates and the associated penalties if and when they are not paid back within the stated terms. Once again, failure to pay back a mezzanine loan can result in a loss of ownership. Companies with strong cash flow and expert financial advisement, however, can easily avoid the associated risks of mezzanine financing, making it a recommended option under a wide range of conditions.

Assessing Whether Your Business is a Strong Candidate for Mezzanine Financing

If one or more of the following factors apply, your business may be a strong candidate for mezzanine financing:

  • Your business requires a multi-million dollar loan for an acquisition, bank refinancing initiative or owner buy-out.
  • Your business reports a high cash flow but has limited assets.
  • Your business’s current debt to EBITDA ratio is not close to or exceeding its current market value.
  • Your business is currently growing and expected to continue growing over the coming years.
  • Other lower interest and shorter-term financing options are either unavailable at this time or do not fit with your business plan.
  • You need to secure a large amount of financing in a short timeframe in order to ensure a time-sensitive opportunity is not lost (e.g., an opportunity to acquire a major competitor).