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NGMezzanine financing is a hybrid of debt and equity financing that can be useful for large projects, buyouts, or expansion. It is a fairly complex form of business loan that gives the lender the right to a share of equity in your business if you default on your loan. Mezzanine finance comes under the umbrella of private debt.
Mezzanine finance sits in the middle between debt and equity finance (‘mezzano’ is Latin for ‘middle’). You might use it as a third option alongside business loans and equity finance if you’re thinking about an acquisition, buyout, or expansion. You can also see it as a form of top-up finance if you can’t borrow as much as you need but don’t want to give away equity at the outset.
Mezzanine finance is effectively a business loan with a twist. Arrangements can differ, but in most cases, if you can’t pay back the debt within a pre-agreed timeframe, the debt becomes equity. In other words, the lender gets a share of equity in your business if you default on your loan – you’re using equity as your security.
Mezzanine finance is often subordinated to bank debt. This is the most common form, also known as a subordinated loan. It is subordinated in priority of repayment to senior debt but is senior in comparison to common stock or equity.
This type of financing is more suited for existing businesses with at least two years of successful trading history. Startups with low revenue may struggle to obtain this type of financing.
Mezzanine finance is effectively a business loan with a twist. Arrangements can differ, but in most cases, if you can’t pay back the debt within a pre-agreed timeframe, the debt becomes equity. In other words, the lender gets a share of equity in your business if you default on your loan – you’re using equity as your security.
Mezzanine finance is often subordinated to bank debt. This is the most common form, also known as a subordinated loan. It is subordinated in priority of repayment to senior debt but is senior in comparison to common stock or equity.
Advantages:
- Accessible to those with poor credit and no assets to secure the loan.
- Retain equity of your business (upon return of loan and as per contract terms).
- Greater flexibility; choose up-front whether you want your loan to be equity-bearing or not. Can’t choose between debt and equity? Why choose?!
- Excellent for management buy-outs or preparing for exit scenarios.
Disadvantages:
- You will lose equity if you stipulated that as a result of non-repayment.
- The cost of finance may be more expensive than a straightforward arrangement (non-hybrid).
- Lenders will want to see strong growth projections and profitability.
This type of financing is more suited for existing businesses with at least two years of successful trading history. Startups with low revenue may struggle to obtain this type of financing.
Private debt – Private debt is an umbrella term that refers to debt products that are financed by non-bank institutions. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not issued or traded on public markets.
Direct lending – Direct lending is a type of private debt financing, i.e., it refers to debt investments that come from institutions other than banks. Lenders (usually asset management companies) combine their capital together into a professionally managed fund, which provides debt products to businesses. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not regularly traded on public markets.
Special situations – ‘Special situations’ fund are unusual or one-off events (including rumours and news stories) that mean the market is less able to value a business properly. These events include spin-offs, mergers, bankruptcy, litigation, succession, or shareholder action. Special situations funds are equity funds that look to exploit these events by buying equity in these businesses.
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