Is Mezzanine Financing Right for You?

Mezzanine financing can mean the difference between your making that acquisition or successful investment or giving it a miss, but is this kind of loan right for you and your business? Mezzanine lending is becoming increasingly popular in the aftermath of the financial crisis, particularly since banks are less willing to lend the amounts they did in the past. While this kind of loan is desirable in some cases, it also carries significant risk and can compromise your control over your company in the worst case scenario. On the other hand, the risks may be worth taking if the investment opportunity is large, and a mezzanine lender can be a valuable tool in the process to expanding your company.

Mezzanine financing is best-suited for seasoned companies that want to take growth to the next level. Given the risks involved with these loans, they are not ideal for start-ups or young businesses that are struggling. The penalties for default can be severe, including the mezzanine lender taking control of some of the company, so it is an option for businesses that have enough capital to cover the loan and has a low risk of default.

Mezzanine financing is not right for a company falls short of the capital requirements to make an investment, but can benefit a business that has the necessary capital and wants to deploy it or keep it free for other uses. If, for example, the bank offers 70% financing, rather than using your own capital for the other 30%, it might be worth it to get a mezzanine loan to cover part of the remainder so you can use your capital for other investments.

Mezzanine financing has a high interest rates and elevated premiums since the repayment period tends to be shorter than with other kinds of loans. For that reason, businesses and investors may consider this kind of financing only if they expect substantial growth prospects. Many borrowers use this kind of financing as a temporary loan to be paid off not long after it is taken. If the loan is defaulted on, the lender can translate the debt into equity and control some of your company, so this kind of loan is best for financially stable companies and investors.

It is a good idea to choose a mezzanine lender that understands your business and investment, since the firm may exert make certain demands concerning the running of your business in exchange for financing. However, the relationship between the mezzanine lender and the borrower can be a productive one if both are on the same page.