Mezzanine financing is a type of funding that can work for two different applications. It can provide funding for the acquisition or recapitalization of a business, or it can provide debt capital for a business to expand. Although they sound the same, these are two separate things, and mezzanine funding covers them both.
A Little Bit Equity
Even in big business, the owners of Fortune 500 companies face times where they need to increase the equity within their venture. In some cases, a company wants to acquire another company, or perhaps they need to do some house cleaning and adjust who owns what within the corporation. Maybe they’re upside down in their commercial property mortgages. This is where mezzanine financing is a little bit equity.
In these cases, lenders invest in the business venture, whether that is to finance an acquisition or put their own money into the company to replace partners that are too expensive. The lender invests his or her own money into the business and becomes an active partner in the operations. This works well for those looking for instant equity and the guidance that goes along with this type of funding.
A Little Bit Debt
Mezzanine financing also provides businesses debt capital, which they can use to expand. There are many different ways a company can expand its operations, including buying out current management or issuing shareholder dividends designed to encourage additional investment in the business venture. When lent this way, the money is considered debt, and it must be paid back.
Does this mean you’ll go through an extensive application process? Not necessarily. You will have to prove to your potential financers that you do have a history of earning profits in your company. You must also assure them that your product and you have a good reputation. Remember, mezzanine funding is more than a loan; it’s an investment in your business, so lenders will want you to be on the up-and up, but they will also be more flexible if they see profit in your vision.
Mezzanine financing provides business owners with the instant equity or debt capital they need to expand their company into a more profitable venture than it already is. The lender invests in your company, meaning that he or she has vested interest in your success. While you might lose some of your control, the sacrifice is worth it in the end. You will receive the funding you need and the business expertise of your new investors along with it.