Mezzanine Financing: Between Debt and Equity
Mezzanine financing is a crossbreed of debt financing and equity financing. The crossbreeding properties help the lender switch to an equity interest if the loan is not repaid, even after other senior lenders have been paid. They already have strategized instruments known as warrants. It raises the worth of the assisted debt, and gives room for easy access for the bondholder. Mezzanine financing is mostly linked with skills; it can set priority standards to choose a new owner above the existing owner in bankruptcy. Most of the time, the loans come from long-term capitalists and existing lenders, and mezzanine finance can also carry tax-deductible interest.
The characteristics of mezzanine loans: there are always doubtful financial debts, mezzanine loans carry higher profits compared to average debt, installment payment is not allowed, they are subordinate to senior debt, and variable interest on the borrowed money may be included.
Mezzanine financing can be requested for the payment of dividends to stockholders; when purchasing new shares or collaborating with a business; to fund the growth of the organization; for a recent financial acquisition; and to support a new management takeover.
The advantages: mezzanine financing is further controlled by present stockholders, with no need to change ownership. It isn't collateral-centered, because there is a massive flow of income. Raising equity from capitalists is costly compared to pricing this kind of equity. The borrower can reinvest money into the enterprise because there is no instant principal payment. It is a long-term financial plan. And it does not require a change in ownership or control, since existing owners and shareholders remain in power.
The disadvantages: mezzanine loans are more costly than a bank loan, they are relatively risky, and the lenders like to intrude into the businesses they lend funds to, which gives them the privilege to increase borrower returns.