Everything You Need to Know About Mezzanine Lending

Mezzanine lending can seem complicated at first, but once you get a handle on it, you may be able to see why it is a popular form of financing for companies that want to expand operations. It is a high-risk form of debt for both the borrower and the lender, and is usually not the financing of choice during lean times or for a company that is not tried and tested, however, it can provide significant rewards. Mezzanine financing blurs the distinction between debt and equity. It involves a number of lenders, many of whom may get repaid sooner, but the mezzanine lender has the advantage of having a warrant that will allow a security to be transformed into equity.

Mezzanine lending is usually additional debt taken after a senior lender has provided most of the loan. If someone wants to buy an additional location for a business, the lender may be willing to loan the company 70% of the money, leaving 30% to be provided by the business itself. A company owner can opt to make a deal with a mezzanine lender for 15% of the remainder, and contribute 15% of the company’s own funding. This will increase the return and will lessen the burden needed to make the investment.

While a mezzanine loan means that the business owner can reserve capital for other uses, such as growing the business, this type of lending does carry a high interest rate, sometimes as much as 20%. Many business owners who take mezzanine loans believe that preserving capital will translate into growth that will enable them to refinance the loan quickly. If they hold onto the mezzanine loan, they may find the capital they saved is deployed in a way that will maximize profits.

Mezzanine lending provides advantages and disadvantages to the borrower and the lender. The schedule of repayment and amortization can be flexible. If the lender has a history of working with successful companies, the assistance provided by the lender can be valuable. In addition, mezzanine loans can raise the value of the stock.

Mezzanine lenders can dictate certain terms to business owners, and can limit their ability to borrow more money or deploy their resources in certain ways. While the input of a seasoned mezzanine lender can be an advantage, it can be an intrusion if the vision of the company does jibe with that of the lender. However, in many cases, the arrangement can work out harmoniously and be mutually beneficial.