Is a mezzanine loan suitable for your business?

Mezzanine financing is indebtedness that falls between senior debt and equity with both debt and equity characteristics. The definition of mezzanine financing according to Investopedia says that it is a mix of debt and equity, which enables the lender the ability to convert the debt into equity, if the borrower fails to repay the loan after the senior lenders such as venture capitalists are paid off.

Since it is subordinate and does not require any collateral, the interest rate on mezzanine loans is relatively high, which is much more expensive than senior debt but is usually cheaper than equity.

Mezzanine financing often requires lenders to receive benefits like equity participation in the form of warrants, direct equity shares, or the ability to co-invest in both debt and equity. Borrowers use mezzanine financing to increase the total loan amount or obtain financial assistance when senior debt is unavailable.

Mezzanine financing is high-risk and high return financing, which is not for all companies. Mezzanine financing is a great option for companies that have high-growth profiles along with revenue growth rate of fifteen percent or more, accompanied by regular and positive cash flow.

Generally, private equity funds or small business investment firms are mezzanine lenders. For those looking at mezzanine finance Australia, Lightspeed Mortgage Management is a company that helps small and medium enterprises with property development financing. You can expect quick loan approvals and completive interest rates.

Mezzanine loans can fund anywhere from sixty-five to ninety percent total developments cost of a real estate project, which means you do not have to give away equity to finance large projects. For businesses that have inadequate working capital, mezzanine financing can be an excellent option for business owners.

Mezzanine loans offer more flexibility than traditional loans. Borrowers generally receive four times or more in cash flow leverage, especially at the beginning of the loan term.

Credit facilities are generally made up of interest-only term loans.

Mezzanine loans involve payment-in-kind, where some part of the interest on the loan is permissible to accumulate over the term of the loan. This interest is paid along with the principle at the time of maturity.

From the lender’s point of view, the issuance of mezzanine debt allows them to share the equity, increasing the interest in the success of the business they invest in. Consequently, lenders are more likely to be flexible with financing requirements or contractual challenges arise.

Mezzanine loans have early repayment penalties. This means that if a party repays the loan before the term end, they would be liable to pay all the interest for the term agreed upon. Also, borrowers are at risk of losing a significant portion of their business in terms of capital and control if they cannot pay the loan.

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