What Is Mezzanine Investment?
In the world of business funding, there are typically two main ways to get the money you need to get a business on the ground.
The first, and most senior financing option is debt, which usually takes the form of a business loan, with the other being equity or stock in a company. Each has advantages and disadvantages but often lack flexibility.
Stock in a company is only as valuable as the company is, and once a debt is paid off, the relationship between debtor and lender ends which could be a missed opportunity. This is where mezzanine finance comes in to fill in the gap.
A mezzanine financing system is a hybrid of the two types of funding and is a common strategy when attempting to buy out or acquire another company or raise funds with a specific project in mind, with the main objective being expansion.
Mezzanine loans work as business loans that after a certain time has passed convert into an equity share of the company. This means that lenders get not only interest payments on the loan but also a share of the profits.
Often it is used when the amount of money that needs to be generated is large enough that a traditional business loan would not be enough to cover it.
They are riskier than senior debt, as they would only be repaid after senior debt obligations (as a second charge loan) but have priority over financial stock, either preferred or common.
However, because of their flexibility, the increased amount of cash that can be unlocked and the potential to unlock greater growth without losing control of the business, they have become a popular tool for expanding a business, although like any other finance there is a risk attached to it.