Mezzanine Finance

Mezzanine finance is a business loan that combines elements of both equity and debt financing.

Though more complex than other forms of financing, mezzanine finance offers companies a way to access funds for growth while providing lenders some protection if the business cannot repay the loan 

How does mezzanine finance work?

Mezzanine finance is a type of business loan where any security which is provided by the borrower over assets, will rank behind the security it has provided to "senior" lenders.  

If repayment isn’t possible, the lender may have the option to convert the loan into equity, gaining a share of ownership in the company. However, this only occurs after other lenders and investors have been repaid.

Mezzanine finance can be a viable solution for businesses facing high risks of non-payment that prevent them from qualifying for traditional loans. It might also be an option when the total funding needed is too large for any one lender to provide.

What are the benefits?

There are several potential benefits to Mezzanine finance, including:

• diversification: mezzanine finance can help reduce a company’s reliance on a single type of finance, thus boosting its overall resilience#
• higher levels of funding: it could be possible to secure higher levels of finance through mezzanine financing than through other forms of business finance
• minimal equity dilution: as mezzanine finance is usually part-debt, part-equity, the business doesn’t have to allocate an ownership stake unless they are unable to repay the loan
• structure of capital: as mezzanine finance is often shown on a company’s balance sheet as equity, it can reduce the debt levels of the company. 

What are the potential drawbacks?

Like all finance types, mezzanine finance can bring with it certain disadvantages, including:

• higher cost than debt finance: due to the perceived higher risk and the larger amounts offered, interest rates tend to be higher for this type of finance when compared to other debt products
• can lead to equity dilution: if the business fails to repay the debt it can lead to a dilution of equity
• longer lead in times: due to the complexity of mezzanine finance and the amount of due diligence required, it can take longer to access than other forms of finance
• interest rate change: sometimes the repayment terms for mezzanine finance include both fixed and variable interest which means there is a degree of uncertainty for the business around how much repayments will be month to month.

How do I access mezzanine finance?

You can look for mezzanine finance providers by searching online.

Note that, like equity finance, you will likely need to provide several documents for your business including a business plan and evidence of strong cash flow.