Small to medium enterprises (SMEs) help local economies and the Mezzanine loan can help those enterprises flourish. SMEs boost business, enable employment and make the markets bloom, but sometimes a little help is in order.
Expansion requires capital, and often it is the resource companies lack the most. Thankfully, a lot of financing options are available to businesses that can help their businesses grow. But with the variety of options comes confusion.
It is easy to get confused about what kind of loan is suitable for your company. While the ownership security of debts is enticing, the absence of financial burden in equity financing is also very tempting. We’re going to help you look into the Mezzanine loan next.
What Is A Mezzanine Loan?
A Mezzanine Loan is a blend of debt and equity financing. Both small and medium enterprises usually take this loan to expand their business. Mezzanine debt is a subordinated debt.
A subordinated debt has to be paid after senior debt but before equity debt at the time of liquidation. Suppose your company needs capital of $ 100,000 for a new branch, but senior debt lenders like banks and financial institutions are only ready to give you 75%.
And you do not want to give 25% of your company’s ownership to equity stockholders. You can then take a Mezzanine Loan for the additional 15% from outside investors after promising them high rates of return (usually 10% to 20%) and future share in equity.
This will give you 90% of the capital required, and you can invest the remaining 10% as personal capital.
What Are The Features Of A Mezzanine Loan?
Ownership remains with you
The advantage of taking a Mezzanine Loan is that you do not have to give up the ownership of your company to investors. However, you may have to sign warrants promising the investor a small percentage of the equity capital once the business picks up.
Flexible terms of Repayment
A Mezzanine loan usually does not have to be paid before returns on investment start coming in. Interest charges can be paid with cash or added to the loan balance.
While Mezzanine financing has a lot of perks, the loans have significantly higher interest rates. The rates typically range from 10% to 30% as opposed to senior debt rates, which vary from 5% to 10%.
Better Financial Structure
Mezzanine loans often appear as equity amounts on the balance sheet. This gives the business a better financial standing on paper and makes it easier to qualify for other types of financing.
How To Get A Mezzanine Loan
Acquiring a loan if you are new to Mezzanine financing can be tricky. Make sure you follow these simple steps before making a decision.
Step 1 – Gather Information
First of all, you should talk with your company’s accountant, banker, or attorney. They can help you with finding potential lenders by referring to directories that list venture-type capital investors.
Step 2 – Talk to Investors
Once you have the name of potential investors, you should talk and discuss possible terms of the arrangement with all of them. The more you talk to investors, the more clarity you will get as to who will be the perfect match for your enterprise.
Step 3 – Prepare a Comprehensive Proposal A Mezzanine Loan
Long term financing, like Mezzanine loans, requires more detailed proposals. Along with audited financial statements, you will have to include a description of your products and services, financial projections, and the company’s management information.
Step 4: Set your boundaries
It is your responsibility to decide how much information you can reveal about your company and what you would like to keep confidential. You can show the amount and level of knowledge once you have talked to the investors.
Should You Get A Mezzanine Loan?
Mezzanine Loan is perfect for your business if you have high growth prospects but limited financing options. Mezzanine Financing protects your business against equity dilution and floating interest rates.
It is a middle-path that has saved many companies from stagnancy. It can be your key to a bigger, more flourishing business. So if you want your company to grow as big as you dream it to be, it is time to make a decision and see it to completion.