If you need to acquire financing but you don't want to take your company public, mezzanine finance provides you with a great opportunity. A lot of businesses seek mezzanine finance when they don't want to give up ownership of their company but they need to find a way to acquire the money.
What is mezzanine finance?
Mezzanine finance is basically a combination of debt and equity financing. This blended form of financing provides you with a chance to acquire money without fronting collateral to secure the loan. The nice part is you can acquire the funds and you may not even need to worry about your business credit and concern yourself with whether or not it is at a high level.
What's the risk?
Since you don't need to front collateral when you apply for mezzanine finance, you already have a reduced risk. Like every other type of financing there has to be some type of catch right? The risk with mezzanine finance is the interest rate. To put the risk back onto you instead of on the lender, they are going to put up a high interest rate on the loan. Similar to a personal loan, your interest rate is going to be around 20-30 percent or higher for the loan. This is the only way the lender can make a profit on the loan in the event that you default on the loan. The other difference with mezzanine finance is that the lender actually will hold a piece of ownership in the company. They can choose to capitalize on this ownership if you default on the loan and they are concerned that they will lose their investment.
Why use mezzanine finance?
When you take your company public, you will lose ownership in it. Mezzanine finance provides you with a chance to acquire the funds but you don't need to give up ownership in the company. The only time when you will lose ownership in your company is in the event that you default on the loan. The nice aspect about mezzanine finance is that the investors usually want to see your business become a success. They aren't interested in watching your business fail and they will provide you with solid advice to help it succeed. This is because they want you to repay the loan because they are earning a high amount of interest on the loan. Although there is the potential to earn more money by taking over the company, they may not have the same amount of interest in the company and they most likely do not want to run it.
What do I need to acquire mezzanine finance?
Since you are not offering collateral to secure the loan, you may find it a bit challenging to acquire mezzanine finance. You must be able to provide the investors with a copy of your business plan along with strong financial records. They need to see that you have a strong financial background and that your company has the potential to grow in the future. They will want to find out what your reputation is in your given industry to see if you are well respected by your customers and by your competitors. As you provide them with the information they need, they can assess your risk load and determine if your business will be able to remain in business for many years to come. What does the future look like for your company? Is there room for growth and expansion? Can you use the money offered by the lender to provide for a solid future for your company?
Corporate Credit Concepts specializes in mezzanine finance. For more information about mezzanine finance and how it might benefit your business, please CLICK HERE for a free phone consultation.