What is Mezzanine Finance?
Mezzanine finance is a type of secured loan that uses a combination of debt (paying interest) and equity (giving shares to the lender). For some property purchases or business investments that are deemed riskier, mezzanine finance lenders can help you borrow larger percentages (up to 90% LTV).
You may just pay interest known as ‘payment in kind’ interest (PIK) or if you are struggling to keep up, a clause kicks in which gives the lender a percentage of the deal or property.
Mezzanine finance is often used once bridging finance has already been used but the terms have expired, the project needs more funding or needs to be refinanced. Since it is later in the loan’s lifecycle, the only way that a lender is willing to borrow is if they can receive equity too.
Key Terms:
- Borrow £50,000 to £25 million
- Repaid over 1 month to 10 years
- Up to 90% LTV available
- Secured against a property
- Combines debt and equity
- Property at risk of repossession
What is Mezzanine Finance Used For?
Mezzanine finance providers will typically work with projects that are deemed higher risk or to top up an existing loan.
High Risk – For some property developments or investments that are too risky, the lender may only wish to proceed if they can charge interest but also have a share of any profits – hence taking shares or equity is the only way to proceed. This could be with properties that need refinancing or have very tight margins.
Topping Up an Existing Loan – If a borrower has an existing loan (such as a bridging loan) and needs to borrow more money, they may come to a mezzanine finance lender to top them up. Adding interest on top and giving away equity may be the only way to proceed – and at this point the borrower or property developer has come far and needs capital to complete the job.
Mezzanine finance can be used for property developments, management buyouts, recapitalisation, organic expansion or funding business growth.
When using mezzanine finance for property, this includes new builds, residential, commercial, HMOs, renovations, extensions, offices, shops, stores and more.
Mezzanine Finance Example
Customer A is looking to borrow £1 million to purchase a property for development purposes. They can secure 60% LTV through a bridging lender, but will use a mezzanine finance lender to borrow a further 20% and this could be a combination of interest and giving away equity. Customer A will be required to put in the further 20% themselves.
Am I Eligible for Mezzanine Finance?
To be eligible, you must:
- Have an exit strategy
- Must be a limited company
- Your loan is secured against a property or asset
- You must offer 5% to 20% in equity to the lender
- All credit histories considered
- UK, Scotland and Wales – and other countries considered
You must provide:
- Proof of purchase
- Proof of identity
- Proof of limited company
- Any costings, business and exit plans
How To Apply for Mezzanine Finance With Lending Expert
Step One – Use our price comparison table to compare mezzanine lenders and the terms and rates that they offer. Click on ‘Get a Quote’ and enter a few details about you and your project.
Step Two – Complete paperwork requested by the lender including proof of purchase, identity and exit strategy. Your loan amount and terms will be confirmed during this stage.
Step Three – Once approved and completed, your solicitor will liaise with the lender and this can be funded in a matter of days or weeks.
How Do Repayments Work For Mezzanine Finance?
Repayments are paid in interest known as ‘payment in kind’ interest (PIK) and this can be paid back each month or deferred until the end of the loan term.
Whilst giving away equity is part of the mezzanine loan agreement, this percentage may increase if you are struggling to keep up with repayments.
If you fall into arrears on your loan, the mezzanine finance company may be able to repossess your property in part or full to recover the amount they have lent out to you.
Is It Safe?
Yes, mezzanine finance is safe. It is usually used for purchases or projects that are riskier for the lender or in the final hour and need extra funding. To overcome this risk, the lender takes a small percentage of the overall deal or asset.
Some mezzanine finance lenders are regulated and some are not, but the terms of the agreement will always be clear and transparent.
Note that if you are struggling to repay, your property or asset could face repossession.
How is Mezzanine Finance Different To Bridging Finance
Mezzanine finance is a loan that allows you to borrow up to 90% LTV against a property purchase or other business investment and your loan repayments are based on paying back interest and always giving away shares or equity to the lender.
With bridging finance, you are borrowing money for a short term (around 3-24 months) and only borrowing up to 70% LTV. This is used for purchasing a property and usually something at a tight deadline (such as properties purchased at auctions). With a bridging loan, you are just paying interest only and there is no equity involved.
A mezzanine finance loan is often used to top up and existing bridging loan, whether it is to help refinance it or offer more funding if it has run into extra costs.
How is Mezzanine Finance Different to Senior Debt?
Senior debt is a type of secured loan that takes first tier when payments are not made, such as a mortgage or the original business investment.
Mezzanine finance is classed as junior debt, because it is the second tier when it comes to payments. So whilst the main lender or bank will get paid first if the customer goes into arrears, the mezzanine finance provider will usually be second.
Why Use Lending Expert To Compare Mezzanine Finance Lenders?
Lending Expert has a real expertise in secured loans and has helped thousands of customer find the right product for them.
Our passion lies in finding the right loan for the right customer and when you apply for mezzanine finance, our team will consider all other options including secured loans, bridging and development finance to give you as much choice as possible and help you get the most competitive terms.
We offer a completely free service, only taking a commission from the lender if your loan is funded. Our team and partners are quick to respond, getting you an indicative quote on the same day and if you approved, you can usually receive funds in a matter of days or weeks.
