There are several advantages of mezzanine layer financing. Firstly, the mezzanine layer is positioned below the bank loan at a higher risk layer of capital. It is not secured and its ultimate repayment is subject to the success of the project being funded. This mezzanine layer functions as venture capital to advance the strategic growth of the company. Often, this layer of capital is the hardest to raise buy yet the most critical to driving growth. Companies can usually generate very strong growth with this mezzanine layer financing. Funds can be used in a variety of ways, empowering management to fund the highest potential projects on their horizon.
Because of its position, it is the last dollars out which means, it will be unlikely to be repaid if the company does not succeed. As such, lenders of the mezzanine layer financing are very careful and are trained to spot high growth companies that have the necessary elements to succeed in their growth. Mezzanine lenders are disciplined in their review to ensure the company has strong processes and management in place. Most companies do not have the necessary elements in place to pass the mezzanine test. The ability to raise the mezzanine layer financing gives a company a huge leg up on the competition, and empowers them to aggressively fund their future growth. With outside capital coming into the business, management can grow faster and invest in areas they would not be able under normal circumstances.
Finally, mezzanine layer financing is significantly less costly than bringing in an investor. Investors usually want control of the company or greater than 51% of the shares. Mezzanine lenders want interest payments and a small upside participation to compensate them for the risk of the loan. Mezzanine layer financing provides critical development capital, in a flexible way at a very low cost – a triple crown of advantages for the discerning middle market company.