For smaller or medium sized companies that are looking for financial capital but want some flexibility to go with it, mezzanine financing offers an alternative to traditional sources of financing. Mezzanine funding combines both equity and debt as a business owner is lent an amount from a mezzanine lender who also buys stock from the borrower’s company. Business owners are finding this form of financing to be attractive in how it can be acquired and how it operates.
First, mezzanine providers are chiefly concerned how profitable your outfit is, not its size. An innovative business, even if it’s small, has great growth potential with the right financing, which is what lenders are looking for. Mezzanine lending firms will check to see if you have a quality reputation in the industry, a solid and reliable product that sells, as well as an expansion plan that is feasible for your business. These expansions can include planned acquisitions or an initial public offering.
Secondly, traditional loans usually require collateral to back a loan. However, mezzanine financing generally does not require collateral. This means the borrower’s business is free to use its capital to expand its operations and is not tied up in collateral. Also, mezzanine operations offer more flexibility in paying back loans to the lender, including when it comes to the time period of the loan, amortization and coupon rates. Since a mezzanine firm is more focused on the equity that’s obtained through the company stock, they will be more likely to offer loan terms that are flexible and favorable to the borrower.
Finally, having a mezzanine lender buy your stock does not mean they take over the whole business. It is true mezzanine providers do exert some measure of control over the borrower’s business in exchange for financing, such as having an employee join the business management team to supervise actions on the ground or having a member on the board of directors that can vote. However, the borrower overall does not surrender their daily control of their operation. They also are not required to alter their staff in any significant way. Mezzanine lenders are satisfied if the business continues to make a profit and won’t try to take away full control of the enterprise.
The bottom line is that mezzanine financing can be a valuable source of working capital for a growing business. Business owners that are looking for a flexible form of financing that can launch their enterprise to new heights will greatly benefit from the partnership of mezzanine providers.