Mezzanine Finance is a type of business loan which involves a combination of debt (a loan) and equity (giving up shares in your business). Based on the Latin word for ‘middle,’ you may also think of a mezzanine as being an extra floor in a room – and that is exactly what it is. It is in the middle of borrowing money and giving up shares to help you get the finance for need.
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When Would You Use Mezzanine Finance?
This type of funding has two main purposes:
High risk – when the opportunity is maybe considered too high risk for the lender or the borrower cannot afford the loan, they may suggest this type of finance because it means that they also get equity in the business if it takes off. So although it could be a risky investment for the loan provider, the return could be enormous which is why they would prefer to get shares.
Top up an existing loan – imagine that a lender has provided a loan for a property development or investment opportunity but the borrower still wants to drawdown more. But if the lender does not want to lend out more, they could take a percentage of potential profits. For instance, they provide 60% of funds in a loan form, 20% as equity and then the customer has to put in a remaining 20% of their money.
The most common examples of using mezzanine finance include:
It is common for the borrower to be lacking sufficient funds for their project or business. But, this type of loan can give them the necessary capital they need to grow their company. For a property, the money can be used for bricks and mortar and labour. For management buyouts, it is a based on the existing and potential value of the business and growth based on hiring more staff, completing project and meeting targets. For a high tech startup with huge growth potential, they may need that injection of cash to grow their business and mezzanine funding could be their best option. (Source: Wikipedia)
What Are The Terms of Mezzanine Finance Lenders?
This type of finance is usually treated as a simple loan for a certain duration e.g 12 months. The loan is either repaid in one lump sum or interest repayments can be deferred. (Source: Funding Options).
However, if the customer has not reached their targets by this timeframe or they are unable to pay back their loan, it triggers a clause in the contract so that the loan provider will get equity in the business instead.
For the borrower, this can be a sign of relief that they are not put into a position of debt and they still have the initial funds to grow their business. The only downside is now that they to give up equity in their company to the lender.
How We Can Help
We are a licensed broker in the UK who can help facilitate mezzanine finance for your company. We have a relationship with the award-winning Brightstar Hub who are based in London and they will help to process your application. The established firm work with a number of mezzanine finance providers in the country and specialise in property development projects.
Loans are available ranging from £50,000 to £25 million and you have the choice of receiving the bank transfer in one lump sum or in stages so that it can be used at different milestones of your business.