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How mezzanine debt can be used to fill a capital gap

How mezzanine debt can be used to fill a capital gap

A capital gap is an absence of necessary funds to fund operations, growth or acquisitions. It occurs when companies go through transitional phases that either stress them financially or present opportunity for growth. Capital gaps can be transitory or permanent in nature. Acquisition driven capital gaps are one time in nature and can be easily filled through mezzanine debt. Permanent capital gaps such as limited lines of credit, often persist for a long time and can result in suppressing the growth rate of a company. Whatever the origin, mezzanine debt is an ideal way to fill the capital gap. Mezzanine lenders have a unique perspective on qualifying companies for a mezzanine loan. They don’t look solely at assets and personal guarantees like bankers do. They look at the cash flow history and potential of the business to repay the loan over the long term. It is common when borrowing money to find a senior debt lender to fund a majority of your deal. Senior debt lenders will usually provide only a portion of your capital gap. Once the size of the senior loan is established, the remaining amount can be filled with either mezzanine debt or equity investment. Equity investment usually produces heavy shareholder dilution and can result in a change in ownership of the business. Mezzanine debt has a high interest rate but involves minimal shareholder dilution. Mezzanine debt, by its nature, is current shareholder and management team friendly. It is the better option than equity, when determining how to best fill your gap.

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