Can Your Business Benefit From Mezzanine Financing?

If you are looking to expand your small to medium-sized business, it is likely that you have been investigating a number of financing options. It might be too difficult to obtain a traditional bank loan and you might not be willing to be locked into a partnership with an equity investor. One alternative that provides the best of both scenarios is mezzanine financing.

Mezzanine loans are offered by specialized lenders. Also called subordinated loans, these products are a combination of debt and equity financing. The business owner borrows a portion of the needed funds, while the remaining capital is raised through the sale of shares to that lender.

Subordinated loans are not entitled to receive returns until traditional, senior loans are repaid. In addition, they are issued with minimal due diligence and require no collateral. Since they are a higher risk loan, the interest rate is aggressive, usually in the range of 20 to 30 percent.

Many businesses find these loans to be attractive, because they provide a mix of traditional borrowing and equity financing under one agreement. Here are some additional benefits:

  1. Tax Advantages – Though mezzanine financing rates are high, they are tax-deductible. This helps to offset high corporate tax rates. Therefore, the company’s overall tax rate is significantly lower.
  1. Flexibility – Since mezzanine loans are subordinate to other types of financing, their terms are much more flexible. Amortization schedules, borrowing rules and time periods have many more variables built into them. Since there is no collateral, businesses are free to leverage their facilities and assets so they can grow and expand their operations.
  1. Control – Traditional financing arrangements require that owners cede control of their operations to the lender. In some cases, a mezzanine lender might request a voting seat on the board of directors. Otherwise, day-to-day operations are left in the hands of current management as long as the company continues to meet expectations.
  1. Long-Term Relationship – Since mezzanine loans have an equity component, there is an opportunity for the borrower and the lender to establish a long-term relationship. Therefore, the term of these loans is generally longer than the traditional two to three year timeframe. This allows the business owner to concentrate on growth and expansion. In some cases, the lender is available to provide valuable advice!

Mezzanine financing can be found in a variety of business deals, from highly leveraged buyouts to real estate finance. If you are poised to bring your business to the next level, take some time to see if this approach is right for your firm.

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