An Introduction to Mezzanine Financing
Many organizations finance their growth through loans. One of the popular debt financing strategies for businesses is mezzanine financing. Before you explore this fund acquisition option, it pays to determine what it is, when it is applicable, and who it is suited for.
What Is Mezzanine Financing?
Mezzanine financing is how businesses raise money for a project or acquire assets through debt and equity financing. If you default on your loan, the lender can convert the debt-to-equity interest in your business.
Unlike banks and secured lenders, the mezzanine lender does not claim the collateral of secured loans. The primary motivation for lenders to accept the risk of mezzanine financing is equity warrants. An equity warrant gives a lender a potential stake in your company and rights to future equity value.
An equity warrant allows the lender to buy a certain number of shares on a specific date and at a specific price. For example, a mezzanine loan for a small company may come with a warrant that amounts to between 1-and 5% of equity ownership shares.
What Is the Main Benefit of Mezzanine Loans to a Borrower?
One of the main benefits of mezzanine loans is tax-deductible interest. This reduces the cost of the debt. Furthermore, with a mezzanine loan, you can transfer the interest to the balance of your loan. Therefore, if you cannot pay interest, it will be deferred. This option does not apply to other types of loans.
Which Organizations Benefit From a Mezzanine Loan?
A mezzanine loan is ideal for borrowing companies with a consistent cash flow, are mid-sized, and feature an asset-light portfolio. Lenders look for consistent cash flows because of the interest payments.
Mezzanine loans are best suited for mid-sized companies. Companies seeking mezzanine loans have $10-100 million EBITDA per annum. This allows the lender to make a sizeable profit from the loan and proves that the borrowing organization can generate consistent income.
Lastly, the borrowing company’s assets are not an essential factor in mezzanine financing. Companies with less attractive collateral qualify for these loans because lenders are not concerned about security. Lenders focus on the high-interest rates and your company’s income consistency.
Mezzanine debts are an excellent option for a company that wants to grow but don’t qualify for other types of loans. If you want to expand your business through mezzanine loans, you can count on Toluca Lake Capital. Talk to us for insights on our mezzanine loan products.