Mezzanine financing as a form of hybrid capital has been around for 30 years and is fast gaining popularity as a financing source for corporate expansion projects, acquisitions, recapitalizations, management buy-outs (MBO) and leveraged buy-outs (LBO). Listed below are a few frequently asked questions about mezzanine funding or mezzanine loan financing.
What is mezzanine loan financing?
Defined as a hybrid of debt and equity financing, mezzanine loan financing, also known as subordinated debt is a long term, flexible term loan. Its name is derived from the fact that it is in second position or the mezzanine layer. Mezzanine loans are unsecured by assets. An increasingly popular form of funding, mezzanine financing comes with moderate risks and costs.
How does mezzanine loan financing work?
Provided by independent funds, and structured on an EBITDA multiple basis (the standard mezzanine debt multiple is 3 to 3.5 times EBITDA), mezzanine loan funding is chosen by companies that are unable to finance their growth plans with senior debt from banks. Since mezzanine loan funding is unsecured by assets and does not require a personal guarantee. it’s riskier than a bank loan and the pricing reflects this risk. Generally priced at 16% to 18% per annum, the mezzanine provider charges an interest of approximately 12% per annum and takes a small equity warrant in the business ranging from 1% to 5%. Most mezzanine debt loans mature in 5 to 7 years and they usually require only interest payments with no principal payments for the first 3 to 4 years.
What are the advantages of mezzanine loan financing?
Mezzanine loan funding can be extremely beneficial for companies seeking acquisition funding, growth capital funding, bank refinancing, or owner buy-out, as it comes with a whole bouquet of advantages. The company benefits by
• Gaining capital funds to fuel long term growth.
• Getting a lower cost of capital when compared to equity.
• Receiving less rigid terms when compared to senior debt.
• Avoiding unnecessary dilution from new equity investor.
Who can benefit from mezzanine loan financing?
While mezzanine loan financing can be used for various needs such as finance acquisitions and buyouts or towards accelerated growth, mezzanine funding can be especially beneficial to middle market companies. Mezzanine financing provides improved cash flow due to its non-amortizing loan structure. This helps closely held middle market companies get to the next level and use their cash to build the business. Mezzanine loan financing is a great way to fund an acquisition because it gives the acquiring company patient and long term capital to both buy and integrate the target business.
Mezzanine debt is a reliable source of flexible long-term capital and is an advantageous alternative to equity.
Attract Capital, an industry pioneer in mezzanine loan financing, has 20+ years of experience in helping private companies access mezzanine funding directly from mezzanine lenders. With a lender platform of over 100 mezzanine debt-financing providers and a well-developed workflow process, Attract Capital can provide quick sourcing solutions for your mezzanine loan funding needs.
Contact us now to set up a free consultation.