Search Our Online Directory

Mezzanine Funding for Your Business

You have started a business, made enough profits to sustain yourself, and reached some important milestones. Now it's time to take your business to the next level with a brand new project. You envision this project as a major step in the industry. Projects like this cost money, and despite your success, securing this round of capital is sometimes even harder than seed money.

Where does an established company get financing for a new venture when so many funding sources are geared toward start-ups? One option is mezzanine financing.

Mezzanine financing is specifically designed for established businesses. It can be used for leverage buyouts, acquisitions, or expansions, and often takes the form of subordinated debt, preferred stock, or a standard loan plus interest. Mezzanine financing takes the place of primary debt as a source of funds for a new project.

Additionally, financing terms are often flexible, allowing for room to shift during the life of the loan. It can also be a quicker source of funds while a business is waiting for a bank loan. If money is needed quickly and can be paid back in a reasonable time, mezzanine financing is a good choice.

Mezzanine funds are not secured by property, and therefore the lender reserves the right to take over the project in the event of default. It is good to have a solid plan and means of repayment before pursuing funds. Given that this type of financing is designed for businesses experiencing a major addition of restructure, the risk tends to be higher for the lender.

Additions and restructurings can sometimes be difficult and uncertain times in the life of a company. For this reason, interest tends to be higher for mezzanine funds as a way to protect the lender.

The lender's risk is also increased because debt associated with mezzanine funds usually comes in the form of subordinated debt. In the event that the company is unable to complete the project for which it sought funds, senior debt obligations would be paid before subordinate debt.

In other words, after senior debt is paid, there is a greater chance that a company will default on subordinate debt. This is another factor in the higher interest rate and potential project takeover.