In the world of business finance, there are straightforward funding options such as business loans, and then there are the more complex ones like mezzanine finance. But you don’t need to be a finance expert to understand the ins and outs. Put simply, mezzanine finance is a hybrid of debt and equity financing. But what does that mean exactly, and when can business owners use it?
Funding for your large projects and business growth
Mezzanine finance is useful for large projects, growing businesses, and management buyouts. Essentially, mezzanine finance is a more complex form of business loan. When looking for funding, you’ll usually have two options:
- a) debt, where you borrow money and pay it back with interest
- b) equity, where you sell a share of your business in return for cash
Mezzanine finance combines the two into one type of finance. It’s a business loan where the debt eventually becomes an equity share if your business can’t pay back the funding after a pre-set time frame has passed. This means the lender will get a share of equity instead. Where other funding options use assets as security, mezzanine finance uses business equity as security.
Why choose mezzanine finance?
Normally, this type of funding is used when the borrower can’t raise enough money through traditional finance like business loans. Of course, you could still go with equity finance, but not everyone wants to give up shares in their business right away.
Mezzanine finance allows you to borrow a larger amount and repay through profits — it’s a bigger investment aiming at bigger return. Bear in mind though, in some situations you may need to pay back the lump sum, but in others the interest payments can be deferred. In some cases you may also have tax-deductible interest, but you should check with your accountant before committing to anything.
You could also use mezzanine finance as a ‘top-up’ towards the amount you need for a project, in addition to a standard business loan. In other words, the loan might give you 65% of the amount you need, mezzanine finance could provide another 20%, and your business only needs to put in the last 15%.
Mezzanine finance for buyouts
This type of finance can also be used for management buyouts (MBOs) or leveraged buyouts (LBOs). Arrangements like this work similarly to standard mezzanine finance. The main difference is that instead of a single asset, property, or project, it’s an entire business that’s being financed.
If you’re considering LBOs and MBOs, it’s tricky to generalise how mezzanine finance would work in this case because it depends on specific circumstances of the business you’d like to buy. Generally speaking, you can potentially use the value of the business you’re buying as security.
Final thoughts
It always depends on your specific situation, but sometimes it can make sense to combine debt and equity instead of using them in their pure form. Mezzanine finance enables you to raise funds for bigger projects that your business couldn’t afford otherwise, to get the maximum return from the capital you have available.
If you’re looking to raise money for a large project, we can help you find the funding that suits you best.
