Mezzanine Financing: The Advantages and Disadvantages
Mezzanine financing refers to financing that utilizes both debt and equity. When using multiple sources of financing, a company’s structure of funding will be inclusive of senior debt, followed by senior subordinated debt, after which comes subordinated debt. These are then followed by mezzanine debt, with the owner’s equity coming in last. Mezzanine lenders have a warrant that allows them to convert their security into equity at a specific rate if the loan is not paid in full or on time. Discussed below are some of the pros and cons to expect from this type of financing.
It offers flexibility, with the terms allowing borrowers to structure their amortization schedule as needed. The flexible terms also make it convenient for the parties to determine the borrowing rules and the repayment terms.
The owner of the company still retains control of the business. This is, however, possible when the company maintains success in its operations, with the mezzanine lender rarely taking on any active role in the business.
Long-Term Financing Solution
This form of lending is often a preferred method of financing for investors looking for long-term projects. This means that while other traditional lenders will finance your business for the short term, this financing is available for a longer duration. Lenders can also provide strategic assistance where needed.
Increased Value Stock
This lending option also helps increase the value of stock held by a company’s existing shareholders. The equity may, however, end up diluting the value of the stock.
Lending for this type of financing will often come with restrictive covenants. Some examples of inflexible terms include restrictions on borrowing more money or requirements to meet specific financial ratios. In addition to this, businesses may also face limitations in how they spend their money, such as limiting dividend payouts and compensation limits for their employees.
Loss of Control
As previously stated, control is only possible when company operations are favorable. If a business’s economic projections do not work as planned, the lenders acquire more control, with this also likely to happen when the equity is high enough to give lenders a larger share.
Long Approval Process
Lastly, approval and completion of the loan processes can often take a long period. This limits business operations, with this likely to cause losses when businesses forego one-off opportunities.
If you need funds tailored to help you increase your business growth for the long term, Atlas Capital Solutions will be your go-to for financing. Consider reaching out to us today to help you meet your financial obligations.