What Is Mezzanine Lending
Mezzanine Lending is a crossover between debt and equity financing that is utilized to finance company buy-outs, growth and expansion, as well as business acquisitions. Mezzanine lending is generally provided for long terms where principal repayment is not required until the very end of the term. This makes mezzanine lending an ideal source of capital for long term growth or changes in ownership. Because the loan does not have to be paid back right away, the company is able to utilize the financing to take a large growth step. Most companies that secure mezzanine lending are asset light, service businesses that do not possess enough collateral for a bank loan. Mezzanine lending provides a middle solution between bank loans and investors. Banks need to be 100% collateralized and want quick repayment. This constricts the loan size to the company’s collateral coverage. On the other hand, investors want to own a controlling interest in the business, usually at a valuation that is unattractive to the business owner. The bank will not give a company all of the money they need. An investor will give all of the money a company needs but they may end up owning 100%. Mezzanine lending provides a middle solution that can usually provide all of the financing needed, without giving up control nor having an inflexible principal repayment schedule. Mezzanine lending is provided by mezzanine lenders that are utilizing cash flow credit underwriting techniques. This means they do not look to assets but rather the stability and future growth of the Company’s cash flow when deciding the loan. Mezzanine lending is best for companies that have big growth plans and need a large infusion of capital. The loan is usually structured at 3 to 4 times a company’s cash flow. The interest rate is usually around 12% and the term is usually 6 years. If structured properly, mezzanine lending can deliver all the financing you need to close your deal, whatever it may be.