Overview of Mezzanine Financing

March 19:: If your company needs money and is privately held, reasonably successful, and in a rising industry with gross revenues of at least $5 million, it may be a candidate for mezzanine financing. Mezzanine financing is a type of financing utilizing both debt and equity.

What is Mezzanine Financing?

Mezzanine financing involves making unsecured loans to companies who do not have the collateral available to allow them to qualify for traditional bank loans. Ideally, it allows privately held companies to obtain the financing they need for expansion without relinquishing control of their company to investors.

Mezzanine financing is typically difficult to obtain and comes with a high rate of interest, often in the 20% – 40% range. That is why it is for successful companies in growing industries looking for a fluid source of capital. Mezzanine financiers want to see a relatively high rate of growth in the companies in which they invest.

How are Mezzanine Loans Structured?

The term of mezzanine loans is generally 3-5 years and the bulk of the principal is often paid at the end of the loan. That gives the company who is granted the loan the ability to use the principal on the front-end to invest in equipment or plant or hire employees. The amount of mezzanine financing a company can raise is generally some multiple of its projected cash flow.

The loan is often made as junior or subordinated convertible debt. This allows the debt holder to take an equity position at the end of the loan if it is not repaid in a timely fashion.

Sources of Mezzanine Financing

Perhaps the largest source of mezzanine financing is private investors. Insurance companies, pension funds, mutual funds, and development corporations are all also sources of mezzanine financing.