In simple terms a mezzanine loan is like a second mortgage only that it is not secured by the property or assets owned by the company but by its ability to repay the loan from free cash flow. It is ideal for a growing business to expand without issuing equity and diluting the ownership of the company. If your company has stable free flowing cash, it is the best way to acquire finances to invest in projects that will eventually take your business to the next level.
If you are looking for about 10 million to finance an expansion project of your business, the traditional debt method will probably give you about 5 million.The mezzanine capital helps in bridging this gap where appropriate. Since the loan does not depend on the assets of the company it helps the borrower access additional funds which would otherwise not be available.
When to use a mezzanine loan.
Mezzanine loans are usually used when a small with scarce asset base company which is growing rapidly and cash flow is stable and improving, but needs some liquidity to grow more effectively { staff, larger building, larger cash reserve} without erodingexisting shareholder’s equity. The lender will need to be assured of a viable cash flow before giving out the money.
Who qualifies for a mezzanine loan?
A mezzanine loan strictly applies to raise capitals for firms that are way beyond the start up stage and have clear track record of stable growth. Before even considering you for application, the loanee will need to prove that their business has a strong and stable financial growth path. This largely pushes out start-ups, ventures, and entrepreneurs as the risk associated with them would be more than the loaner is willing to take on. Since your business name is your security, if you don’t have one big enough then you cannot secure the loan.
For growing companies with a strong cash flow, a mezzanine loan will go a long way in helping the company to expand its projects. The amounts involved in such an arrangement are quite large in sums. Actually the mezzanine loans are largely acquired in terms of millions of dollars. This is due to the fact that these are the kind of companies that a lender would give without the need for security.
Advantages
Borrowers generally do not lose control over the business and its direction and the percentage owned by the lenders is low. As long as the business keeps making money the lenders will not interfere in the business.
The lending firm will help in advising the borrowers and give them great business strategies that will improve the cash flow. Most lenders have been in business for long and they have experience that one can make use of. Typically, these lenders are interested in the long-term growth of the company, often with interest in owning equity in the firm. As such, they are more reliable.
Mezzanine financing helps to increase the value of the stock held by the equity holder, even though they don’t have a great ownership stake.It also gives borrowers the capital they need to make their business bigger without eroding their own stake in it.
For more information on mezzanine finance visit Pluto Finance
