Mezzanine debt as a bridge loan
A bridge loan is a short-term loan, designed to facilitate a quick closing of a transaction. The term bridge loan is coined from the fact the loan is a transitional, not a long term solution for the company. It will get you from point A to point B but will generally not result in a long term solution. Often, capital is needed to fill a gap due to faster growth or acquisition. When a gap arises and the bank will not fund it, a company should consider a bridge loan as a short term solution. Bridge loans should be handled with care due to the fact that they are generally expensive and become even more expensive if not taken out at maturity. Often, companies use mezzanine debt as a form of a bridge loan, especially for acquisition. With an acquisition, the purchase price will often exceed the asset base of the acquired company, rendering the deal non-bankable in the short term. However, if the acquisition goes according to plan and the assets of the business scale accordingly, the Company may indeed have sufficient assets to refinance the mezzanine debt with an asset based loan from a bank. In this case, mezzanine debt is very effective as being the bridge loan to facilitate the acquisition and immediate scale up of the business. Once the business has grown to the next level, it becomes far easier for a bank loan to be brought in to refinance the bridge. Mezzanine debt fills the role of bridge loan quick efficiently. Mezzanine is the layer between private equity and a traditional bank loan. Unlike the bank loan, mezzanine relies upon a company‚Äôs profitability and potential growth. It requires no principal payments, only interest payments, throughout the first three or four years of the loan, with maturity in five to seven years. Mezzanine is an effective bridge loan solution but also has great value over the long term if the company continues to have an ongoing capital need.