The Advantages of Mezzanine Lending
Mezzanine lending is a way for an established company to take its business to a higher level. It is a method of financing that is chosen when making a leveraged buyout or purchasing a new business location. While it may carry high-interest rates and substantial risk, there are significant rewards to be enjoyed by the borrower and lender if things work out well. The relationship between the mezzanine lender and the business can be closer to that of an investor than that of a creditor and debtor. This is particularly true if the borrower has confidence in the lender and values the input provided.
Mezzanine financing tends to create a loose distinction between debt and equity. The mezzanine lender is not repaid as quickly as the senior and subordinated lenders, but the mezzanine lender, by virtue of a warranty, can be repaid in equity. The business owner benefits from mezzanine lending when he or she wants to hold on to more capital for the running of the business. If the company wants to expand into a new area and finds a senior lender to provide a loan for 70% of the purchase, the business has to provide the additional 30%. The company may have the capital available but wants to deploy it in other ways to maximize growth. The business will approach a mezzanine lender for 15% of the remainder and will use 15% of the capital. While the interest rate might be up to 20%, the business owner feels confident in the ability to refinance or to provide enough growth to cover the loan.
Mezzanine lending is often an investment decision. The lender often takes an active role in advising the everyday running of the business. This can be a downside for the company owner who wants autonomy, since the lender can dictate certain terms, such as whether additional loans are allowed or how the company will deploy resources. However, many mezzanine lenders have a strong track record in providing excellent counsel to businesses. If a company is impressed with a certain lender’s history in growing businesses, it may want to opt for the mezzanine lending option tow work with a certain lender.
If the loan defaults, the mezzanine lender is the last one to be repaid, and he or she must try to help the business recover since the lender holds stock. This is an effective safety net for a company because it is in the lender’s interest to see the business succeed and rebound if it stumbles.
