Companies, especially small and medium sized businesses, who wish to acquire a viable financing option for growth and expansion, can opt for mezzanine financing. Sometimes referred to as subordinated debt or junior debt, mezzanine financing is a great option for those mid market companies seeking acquisition financing, growth capital financing, recapitalization financing or refinancing. Mezzanine debt occupies a unique position as a hybrid of debt and equity capital, thereby owing to the name of mezzanine- the intermediate stage in a building. Mezzanine debt financing comes with several benefits that a small or medium sized business could use.
- Mezzanine financing offers extreme flexibility that cannot be found elsewhere. The flexibility to structure coupon, amortization and covenants to accommodate the specific cash flow requirements of the business is a huge plus to businesses.
- There is no personal guarantee on the loan by the owner. The mezzanine lender’s position is junior to the bank but senior to the owner’s equity.
- The owner does not lose control of the company. This is a profound benefit as even though the owner loses some amount of independence, they are unlikely to encounter any interference from their lender, allowing them to continue to run their business as before.
- Mezzanine lenders are generally long-term investors rather than those looking for a quick kill, thus offering a sense of stability and security for the borrowers. The lenders are generally passive and support management’s plan for the business.
- Mezzanine lenders can bring valuable strategic assistance to the business, in terms of fresh insights and sophisticated financial strategies that can greatly benefit towards the growth of the company.
- Mezzanine financing requires that the borrower pays only interest payments for the first three or four years of the loan. This is an advantage for companies that need cash to fund their growth plans.
- Finally, mezzanine capital can provide a company with just the right amount of capital they are seeking. This is because whilst a company will be able to leverage only two to three times its cash flow in senior secured debt, it can raise its total debt to four to five times its cash flow if opting for mezzanine capital.