If you haven’t heard of mezzanine financing before, you are not alone. It’s a type of equity financing whereby investors contribute capital in exchange for preferred stock or subordinated debt. Both types of financing are used for the same purpose and have many advantages. Learn how they work, how to apply, and more! Here are some things to know about mezzanine financing. We’ve outlined the advantages of each, as well as the pros and cons.
Advantages
The advantages of mezzanine financing include tax deductions and the ability to tailor the loan terms. Because it is considered debt, the interest payments are tax-deductible. It also allows borrowers to grow quickly and refinance senior debt when needed. But mezzanine financing does have a few disadvantages, including higher borrowing costs and illiquidity. For these reasons, it may not be suitable for all businesses.
The main advantage of mezzanine financing is that it does not put a financial burden on the business during the financing term. The money does not require the business to take out more bank loans and does not entail regular servicing of monetary obligations. Because the loan period is long, it also allows the borrower to control cash flow during the financing period, allowing the business to develop quickly while reducing its debt burden. Another benefit is that it offers high flexibility. The lender can customize the conditions for the project and doesn’t require a company to pledge assets as collateral. Furthermore, the lender does not require a guarantee of the loan amount, which makes this type of loan a good option for companies with predictable financial flows.
Cerebro mezzanine financing
Cerebro, a marketplace for mezzanine funding, has been a growth driver for private equity firms in recent years. Since its launch in October 2017, the platform has been used to run over $740 million of loan RFPs and predict loan structures. Cerebro has expanded its lending base beyond commercial banks to include mezzanine funds, venture debt lenders, private credit lenders, and business development companies.
With mezzanine financing, investors have the opportunity to earn equity interest in a business. This equity interest is usually in the form of warrants, straight equity shares, or co-investments. Because the amount of equity required is minimal, mezzanine financing allows entrepreneurs to raise a larger amount of total capital, reducing their need to issue equity. By using mezzanine financing, these business owners can enjoy a higher rate of return than they would have if they raised the funds through a traditional equity investment.
Interest rates
Obtaining mezzanine financing can be beneficial for many reasons. These include: It is less expensive than other forms of financing, allows businesses to raise more capital and increases returns on equity. The lender receives contractually obligated interest payments, and mezzanine funding helps companies raise more money. The lender also receives equity in the business. Interest rates for mezzanine financing can vary greatly, so it is best to compare different lenders.
The most common structure for mezzanine debt is a subordinated unsecured term loan with warrants. The investor receives interest payments on the loan monthly or quarterly, and the principal is repaid at the end of the term. Because of the increased competition in the debt market, mezzanine lenders have had to lower their interest rates and decrease the number of warrants that they offer to investors. But this is a benefit for mezzanine lenders because they receive a higher yield than they would with a more traditional senior debt.
Repayment
Mezzanine financing is debt that is junior to traditional lenders. The traditional lender is typically a bank that provides a line of credit or long-term loan. This type of financing is risky because the money is unsecured. Unlike traditional loans, mezzanine financing is paid back from the available cash flow of the company. As a result, repayments can be long. However, there are certain benefits to mezzanine financing that make it attractive to businesses.
When choosing the best mezzanine financing option, keep in mind the terms of repayment. The lender may charge a high up-front arrangement fee, but they are aiming for a 20-30% return on the capital. In case the borrower is unable to make the interest payments, the mezzanine lender can issue a warrant. The repayment of mezzanine financing may be complicated, but it can help you get the funding you need.
Hybrid structure
A hybrid structure for mezzanine financing is a good option for a range of reasons. This type of financing offers a combination of cash interest and payment-in-kind (PIK) interest. In most cases, the loan maturity is a year after the senior debt maturity date. It is also generally structured with bullet maturity and no amortization throughout the life of the loan. Unlike a traditional mortgage, mezzanine financing offers a right to ownership and equity.
A mezzanine lender will analyze the fundamental health of a company and determine how much equity is required to repay the loan. The difference between common and preferred stock is that the former has voting rights while the latter is more secure in the event of a company’s dissolution. When a company liquidates its assets, preferred stockholders will receive their payments. The same principle applies to mezzanine financing, except that mezzanine lenders are directly behind the senior lender.
