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: