Mezzanine finance

Quick facts

u003ca href=u0022 financingu003c/au003e 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 u003ca href=u0022 debtu003c/emu003eu003c/au003e.u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eMezzanine finance sits in the middle between debt and equity finance (‘mezzano’ is Latin for ‘middle’). You might use it as a third option alongside u003ca href=u0022 loansu003c/au003e and u003ca href=u0022 financeu003c/au003e 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 u003ca href=u0022 loanu003c/au003e with a twist. Arrangements can differ but in most cases if you can’t pay back the debt within a pre-agreed timeframe then 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. u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eMezzanine finance is often subordinated to bank debt.  This is the most common form; also known as subordinated loan. This is subordinated in priority of repayment to senior debt, but in senior in comparison to common stock or equity.u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eThis type of financing is more for existing business with at least two years of successful trading history. Startups with low revenue may struggle to obtain this type of financing.

•      Accessible to those with poor credit and no assets to secure the loanu003cbr data-rich-text-line-break=u0022trueu0022 /u003e•      Retain equity of your business (upon return of loan and as per contract terms)u003cbr data-rich-text-line-break=u0022trueu0022 /u003e•      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?!u003cbr data-rich-text-line-break=u0022trueu0022 /u003e•      Excellent for management buy-out or prepare for exit scenariosu003cbr data-rich-text-line-break=u0022trueu0022 /u003e!      You will lose equity if you stipulated that as event non repaymentu003cbr data-rich-text-line-break=u0022trueu0022 /u003e!      You may find the cost of finance to be more expensive than a straight forward arrangement (non-hybrid)u003cbr data-rich-text-line-break=u0022trueu0022 /u003e!      Lenders will want to see strength growth projections and profitability

u003cstrongu003eu003ca href=u0022 data-rich-text-format-boundary=u0022trueu0022u003ePrivate debtu003c/au003eu003c/strongu003e – Private debt is an umbrella term that refers to debt products that are financed by non-bank institutions. Unlike publicly listed corporate bonds, u003ca href=u0022 debtu003c/emu003eu003c/au003e products are usually illiquid and not issued or traded on public markets. Private debt (also known as private credit) u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cstrongu003e u003c/strongu003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cstrongu003eu003ca href=u0022 lendingu003c/au003eu003c/strongu003eu003cemu003e – u003c/emu003eDirect lending is a type of u003ca href=u0022 debtu003c/emu003eu003c/au003e 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.u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cstrongu003e u003c/strongu003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cstrongu003eu003ca href=u0022 situationsu003c/au003eu003c/strongu003e – u003cemu003e‘Special situations’ fund’u003c/emu003e 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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