Mezzanine financing is an increasingly popular way to fil the gap between what banks and traditional lenders are willing to lend and the amount people want to invest. This kind of financing blurs the line between debt and equity and makes the lenders partial investors. These loans tend to be high interest, short term and carry substantial risk for both parties, but offer rich rewards when there is success. Many people try to secure funds through mezzanine financing when they want to grow their business quickly or make an investment that won’t stick around too long. This type of lending is efficient and can give businesses owners flexibility to take advantage of opportunities.
Mezzanine financing is given in addition to what is called senior loans. The mezzanine lenders are paid back only after the senior lenders are paid first, which at first glance may seem to be a disadvantage, but is not when one considers what the lenders are offered as collateral. The lender is given the ability to foreclose on the property if necessary, to be paid back in stock or to take partial control of the business if the borrower is not able to pay back the loan. Therefore, the lender is given leeway to advise the borrower concerning the running of the business, because the lender is a potential owner.
Mezzanine financing is appropriate for borrowers who respect a specific lender who has past success in assisting businesses to grow. If the lender is one that does not want to see the borrower default but is interested in playing an advisory role, this can be a boon to a small business owner, while others may find it intrusive. This is the point at which the lender becomes, in a sense, an investor, and wants to see the value of the business rise, because that increases the value of the lender’s collateral. This kind of financing carries a hefty interest rate and can be short term, but borrowers tend to use mezzanine loans for growth opportunities they expect to come to fruition in the short-term so they can pay back the loans.
Other advantages provided by mezzanine loans is that the interest can be tax deductible, depending on the circumstances. Also, payments can be deferred for a certain period of time, depending on the nature of the agreement. These loans are great ways to supplement regular funding for a special project or a significant growth opportunity, and can give lenders the ability to invest in and advise a company.