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What is Mezzanine Financing?

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  • Written By: Brendan McGuigan
  • Edited By: Niki Foster
  • Last Modified Date: 23 August 2016
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Mezzanine financing offers a way for publicly and privately held companies to attain financing without going public and potentially ceding ownership of their company. It is a blend of traditional debt financing and equity financing, reaping some benefits of both. Like equity financing, mezzanine financing is an unsecured debt, requiring no collateral to be put up unlike traditional bank loans. Like debt financing, it is very fluid and does not necessarily involve giving up an interest in the company.

This type of financing relies on very high interest rates in the 20-30% range to make it profitable. Unlike a bank loan, mezzanine financing does not hold real assets of a company as collateral; instead, lenders offering mezzanine financing have the right to convert their stake to an equity or ownership in the event of a default on the loan.

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Mezzanine financing is a particularly appealing form of liquidity for owners of privately held companies. It is traditionally understood that a privately held company simply cannot achieve the same sort of fluid capital flow as a publicly held company, but mezzanine financing offers a way to balance that situation without going public. In addition to the fact that financers do not retain an interest in the company except in the event of a default, there is also the important consideration that they actively do not want an interest in the company. While traditional equity investors are often striving towards some level of control, a displeasing thought to many private owners, with this type of financing, one can rest assured that the financers will do what they can to ensure you pay off your debt without resorting to default.

Because of the lack of real collateral, as well as the high speed of lending, mezzanine financing is typically more difficult to receive than a traditional bank loan or equity financing. A company must demonstrate an established track record in its industry, show a profit or at the very least post no loss, and have a strong business plan for future expansion. Because of these limitations, this type of financing is not for every business. For businesses looking for a quick injection of capital to grow their already successful business, without giving up an interest, mezzanine financing can be an ideal solution.

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osage1a
Post 9

@anon10575: Companies providing mezzanine financing usually are not interested in lending less than about $1 million. I have never heard of anyone receiving or making a mezzanine loan in the amount you have in mind. That said, it occurs to me that maybe there is way: if you own a company in addition to the property you mention in your post. For more info, please see my post as osage1a, post 8.

osage1a
Post 8

@anon102268: Mezzanine financing is not intended for individuals. It is used by growing companies with stable or growing revenues that are highly predictable. Lenders also want to see a history of profitability, workable expansion plans and an uncomplicated ownership structure.

anon283171
Post 7

@Anon10575: It depends a lot on what rate your mezzanine financing loan is offered at. Often the mezzanine will be significantly more expensive than senior debt.

anon102268
Post 5

Is this kind of finance applicable if you make a personal loan and is it a legal way of the company the borrow the money in this way to a person with the Credit Act of 2005?

anon16995
Post 3

I was wondering as to the institution that can provide this type of loan facility?

anon10575
Post 2

I am constructing an office building and own

the site. I do have a mortgage of 40,ooo.00.

The property is worth 175,000.00.

I have been offer Financing with senior debt and

mezzanine financing? Should I take it?

dghosh
Post 1

How do you calculate the P/L of Mezzanine Financing?

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