Borrowers are not alone in dealing with the pros and cons of mezzanine loans. This type of loan structure also has advantages and disadvantages for lenders. A mezzanine loan is a financing option combining debt and equity financing elements (hence the name). It is generally considered high-risk debt, although it also offers high returns for the lender. To learn more about what a mezzanine loan is and whether this type of financing is right for your business, keep reading. Depending on the terms of an agreement, borrowers may have several options for repayment. If cash flow is not available – or if the company wants to reinvest instead of paying interest – companies can capitalize interest called in-kind payments. For example, XYZ Bank provides ABC, a manufacturer of surgical equipment, with $15 million in mezzanine financing. Financing replaced a $10 million higher line of credit with more favourable terms.
ABC received more working capital to bring additional products to market and paid higher interest debt. XYZ Bank will be able to collect 10% interest payments each year and be converted into a shareholding in the event of the company`s default. Mezzanine loans are often more expensive than traditional loans. Double-digit interest rates are common, or lenders may charge debts on equity to supplement interest. You may be wondering what the benefits of mezzanine loans are. Well, first of all, they don`t need guarantees on behalf of the borrower. If you are the owner of a new business, you may not have the necessary guarantees for stock-based financing options, in which case a mezzanine loan may be a viable alternative. However, in securing mezzanine financing, homeowners sacrifice control and upside potential through the loss of equity. The more mezzanine financing is available, the more interest the owners pay. Mezzanine loans generally have relatively high interest rates and flexible repayment terms. A mezzanine loan is a non-traditional financing method that combines debt with equity for lenders.
It is less of a priority than other debts in the event of a company`s default. In addition, mezzanine loans generally do not require an excellent credit history, which is in stark contrast to most traditional debt-based financing options. Because they are supported by the company`s actions, lenders are more likely to allow potential borrowers with little or no credit or bad credit. For mezzanine lenders, they risk losing their investments in the event of bankruptcy. In other words, when a company withdraws from the business, priority debtors are first paid by the liquidation of the company`s assets. If, after the repayment of the priority debt, there are no assets, the lenders will lose in the mezzanine. Mezzanine loans are a hybrid of debt and equity. Depending on the terms of the agreement and how events evolve, the agreement may grant a shareholding in the lenders` capital.