As a business owner, there are times when you will need to finance important purchases. Finding the right financing solution can be difficult, but when done properly, you can help ensure your company has the money it needs to grow and thrive. Mezzanine is an often-overlooked financing option, but it has been growing in popularity over the last several years. It is a hybrid of debt and equity financing, and gives both the borrower and the lender some interesting options that are not available with other types of financing. Take a few minutes to learn more about mezzanine financing to see if it is right for you.
Key Points to Mezzanine Financing
When a business needs to raise capital, they usually either take out some type of loan or bring on investors. With a loan, the business simply needs to pay the money back, plus some amount of interest. With most types of investors, the business does not pay back a set monthly amount, but the investor becomes a part owner of the company and is therefore entitled to a portion of the profits.
Mezzanine financing, however, is a balance of a loan and an investment. The lender will essentially provide two separate amounts of money. The first will be a traditional loan with a set interest rate, and the second will be an amount that they pay to buy equity into the company. For example, if your business needs $100 million in funds, a mezzanine financier may offer a $75 million loan and $25 million to purchase equity in your company. Once in place, you would have to pay back the $75 million with interest, and the lender would maintain their equity until they decide to sell it off.
Pros & Cons of Mezzanine Financing
Mezzanine financing is a good option for many situations, but it certainly is not right for everyone. Understanding the pros and cons of this type of financing can help you make the best decision for your business. Some of the advantages for a business securing mezzanine financing include:
- Easier to Obtain – Since this type of financing is typically only available for well-established companies, and the lender will obtain some ownership, it is typically easier to qualify for than many other options.
- Lower Monthly Payments – Only a portion of the money raised is in the form of a loan, which can help significantly reduce the monthly payments.
- Bring on a Partner – If the lender is getting a significant amount of equity, they will have a big incentive to help the company grow and succeed. You will be gaining a great partner for the growth of your business.
- Interest is Tax Deductible – The interest in this type of loan is typically tax deductible.
- Interest May be Deferred – The lenders will often be willing to defer the interest on the loan to help your company succeed since they have equity in the business.
Of course, it is not all positive. The following are some of the drawbacks to using mezzanine financing:
- Higher Interest Rates – Since mezzanine financing is typically considered a higher risk option, you will be paying a higher interest rate. In general, it will be between 12 and 20%.
- Giving Up Ownership – Anytime you give up any amount of ownership in a company, you are potentially losing out on huge amounts of future profits that could be generated.
- Potential Restrictions – This type of financing often comes with restrictions written into the contract. For example, the lender may tell the business owner that they cannot borrow any more money until this loan is paid off.
Is Mezzanine Financing Right for You?
Whenever thinking about raising significant capital for your business, you will want to talk with an experienced attorney. Trembly Law Firm will not only help you find the right financing vehicle for your situation, but we can also ensure everything is written up properly to avoid problems today, and in the future. Contact us or reach out to us at 305-431-5678, to go over your financing options today.