The Beginner’s Guide to Mezzanine Financing

When researching alternative ways to finance your business, you may come across mezzanine financing. There are mezzanine loans that you can use to cover your business’s expenses. They are offered by banks and private lenders. Mezzanine loans, however, aren’t the same as traditional business loans. They feature characteristics of both equity and debt financing vehicles. For a better understanding of mezzanine financing and how it works, keep reading.

The Beginner’s Guide to Mezzanine Financing

What Is Mezzanine Financing?

Mezzanine financing is a business financing method that involves the use of a mezzanine loan. It falls somewhere between equity and secured debt. Your business will incur debt with mezzanine financing, but you’ll use some of your business’s equity to obtain the mezzanine loan.

How Mezzanine Financing Works

Mezzanine financing works by providing the lender the right to convert the debt of the loan into equity. If you don’t repay the mezzanine loan according to the terms, for example, the lender will be able to convert the debt into equity. This conversion is typically done in the form of options, warrants or stock shares. In most cases, lenders can only convert the debt into equity after all other seniors have been paid.

It’s important to note that mezzanine loans aren’t considered secured loans. You don’t actually secure them with your business’s equity. Rather, you give lenders the right to convert the debt into equity. In the event of default, lenders will be able to obtain an equity stake in your business by performing this conversion. There are different forms of mezzanine financing, but they all allow lenders to convert the debt into equity.

Benefits of Mezzanine Financing

What benefits does mezzanine financing offer exactly? It’s commonly used for leveraged buyouts. With a leveraged buyout, a company may acquire your business using a mezzanine loan and other financing vehicles. Leveraged buyouts allow for a smooth acquisition by giving the acquiring company the right to convert the debt into equity.

Mezzanine financing can also provide your business with fast capital. You’ll still have to pay interest on mezzanine loans. Fortunately, all interest fees are tax-deductible. You can write off the interest fees of a mezzanine loan on your business’s taxes.

In Conclusion

Mezzanine financing may sound confusing, but it uses a relatively simple format. It involves a loan, known as a mezzanine financing loan, that gives the lender the right to convert to an equity stake in your business.

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