Mezzanine finance can be a very useful way for businesses to raise more money than would be possible based on the current strength of their business alone.
Mezzanine finance gets its name because it sits in the middle between debt and equity finance, representing a third finance option which can be used alongside a standard loan, equity or both.
The fundamentals vary between lenders, but the overall idea is that it’s a combination of some of the risk and reward of equity investment combined with the more predictable income of a loan.
Mezzanine financing gives the lender the right to convert to an ownership or equity interest in the company in case of default. One common arrangement is a loan that converts to an equity share after a set time frame or at the lender’s discretion. This means that if things go well, the business can pay back the money, but if it can’t, the lender can recover costs via shares in the business that increase in value.
Alternatively, mezzanine funding uses shares in the business as a form of security for a loan, so the future growth of the business enables it to borrow more than it would get with a regular loan.
Overall, Mezzanine Finance is worth exploring if you’re considering an acquisition, management buy-out, or a large new project especially if you do not want to sell a large amount of the equity in your business. This may be preferable for business owners wishing to keep as much control as possible.