Mezzanine Financing

by : Edwin Linares

Imagine this. Your business is on a roll. Cash flow is constantly in an upward trend. An opportunity presents itself to further catapult the positive performance of your business. You approach your bank and request for an extension of an additional loan to subsidize the unique circumstance that had just presented itself. You're sure of the success, you are confident with the calculated risk involved. And then, a grinding halt. Your bank disapproves the funding due to insufficient collateral. What can be more frustrating than that?

Many companies today experience this frustration. Even the strongest, most bankable operations are victims of this disappointing decision. This is where Mezzanine Financing comes in.

Mezzanine Financing is sometimes referred to as the 'bridge' between the traditional bank debt loans and the private equity investment. It normally begins as a regular debt loan with the usual interest rates applied. But, in the event that the debt is not paid in time or in full, the loan can shift to some sort of equity loan. This means that the lender does gain a portion of principal rites to the business.

Interest rate for mezzanine financing is steeper than that of regular bank loans. Reason behind this is that the lender takes on a higher risk serving as the bridge between loans. Mezzanine financing allows for quick release of funding for additional capital for businesses that are waiting for their finance standing to improve in order to get approvals for a standard bank loan.

The popularity of Mezzanine Financing is steadily growing among many middle-market businesses. It is viewed as the best option to acquire additional capital. In fact, this type of financing generally assists in business fusions or mergers, business procurement, rising development opportunity, management buy-outs, addition of capital or even corporate restructuring.

Mezzanine financing is characterized by its ability to provide funding business propositions with a higher risk factor versus what regular lending institutions are willing to take. It has the ability to be subsidiary to a bank debt. The absence of security does not cease chances to avail of mezzanine loans, thereby justifying the higher interest rates it requires. And, the final characteristic is the superior return in the form of percentages, shareholdings, and others.

Mezzanine lenders are generally long term seers. They look farther into the future at the probabilities of equity participation. This is very much unlike regular lending institutions whose sole target is the full and timely return of loans plus interest. Mezzanine lenders bank on their chances to capital gains, interest and principals on the sale of business stocks. Now, this sale could happen as a result of the borrower going public, the borrower issuing equity or the borrower being sold. In this regard, mezzanine lenders have larger risks but with the possibility of higher returns.

So, if your business is caught in a problem concerning lack of additional funds, you may want to consider mezzanine financing. Basic business sense will dictate when opportunities are ripe. Brilliant business ideas that present excellent chances for success should not be delayed unnecessarily. Mezzanine funding could be your key to business triumph.