Understanding the Basics of Mezzanine Financing

Understanding the Basics of Mezzanine Financing

The Great Recession has changed many things, and how business owners get loans is one of the more noticeable ones. Today, you hear terms like bridge loans, merchant cash advances, and other unique ways to finance your business venture. One of these non-traditional methods is mezzanine financing, and you must understand its basics to determine if this is the right funding vehicle for you.

Some General Info

Mezzanine financing doesn’t fall into any specific funding category; it’s that unique. It is generally monies received from a private sector rather than a big bank or other lending institution, and it “bridges the gap,” between a business owner and the business transaction for which the owner needs financing. In other words, if you have a business opportunity that you can’t fund, this type of loan provides you with the money you need to secure the deal.

Types of Business Transactions

Companies look toward this financing to help with expansion, the primary reason for a mezzanine loan. Some businesses expand their physical facilities or purchase new locations to increase the growth of their company; others acquire competitor companies to increase their position within their market. This financing can fund either approach, and it can be considered equity or debt financing depending upon the deal’s structure.

Collateral Used to Back the Loan

As with any loan, mezzanine financing requires collateral, but because it is structured differently than traditional loans, backing the money is much easier for those requesting the funds. When securing a mezzanine loan, the business owner can offer a second deed of trust to his or her business, partnership interest within the company, or assign future incoming cash flow to the lender from the financed transaction to secure the funds.

Booking the Financing

Another benefit to mezzanine funding is it is listed on the company books as equity, which boosts the balance sheet and gives the business more punch when it wishes to apply for standard bank lending. This works well for companies that want to continue their expansion or finance other monetary needs under the more traditional lending scope.

Finally, mezzanine financing is more forgiving than other lending vehicles, and even if you do not have perfect credit, you may qualify for these monies. If you can demonstrate that your company has a history of profitability and a good foothold within your industry, a mezzanine financer will likely be interested in backing your venture. Just make sure the business plan behind your expansion is solid, and that you understand the details of your agreement with the lender.