What is Mezzanine Financing?
The Short Answer
Mezzanine Financing explained simply
Mezzanine financing sits between senior debt and equity on a company’s balance sheet. It’s a flexible way to raise capital, often used for growth, acquisitions, or management buyouts. The "mezzanine" part means it’s a middle layer of funding. It’s riskier for the lender than senior debt, so it comes with higher interest rates. But it’s less risky than equity for the company because it doesn’t immediately dilute ownership.
Real-World Example
The Growing Tech Startup
A tech startup needs $5 million to launch a new product. They already have a $10 million senior bank loan. A mezzanine lender provides the $5 million. The terms include a 12% interest rate and warrants that allow the lender to buy 5% of the company’s stock if the loan isn’t repaid within five years. This allows the startup to get the funding without giving up immediate equity.
Why this matters
Mezzanine financing matters because it offers a way for businesses to get significant funding without immediately giving up ownership. It’s more flexible than traditional bank loans and can be a good option when a company has limited collateral or wants to avoid diluting existing shareholders too much. It helps businesses grow when other options are not available or ideal.
Mezzanine financing can be a good option for growth, but understand the conversion rights. If you can’t repay, you’re giving up equity. Make sure the growth potential outweighs that risk.
Mezzanine financing can be a good option for growth, but understand the conversion rights. If you can’t repay, you’re giving up equity. Make sure the growth potential outweighs that risk.
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