A mezzanine loan is a type of financing blending debt and equity. In some cases, a business may need financing for a project/acquisition and traditional lenders are unwilling or unable to offer the full amount. This is where creative financing, such as a mezzanine loan, comes in.
The interest rate on a mezzanine loan is often high, and the repayment terms are flexible.
How Does a Mezzanine Loan Work?
A mezzanine loan is a combination of debt and equity. In some cases, the arrangement can offer equity interest to lenders- depending on terms and how it all unfolds. Typically, a mezzanine lender works with a company that has a successful track record. A mezzanine loan can be used to acquire an existing business or expand operations for a profitable business.
Advantages vs. Disadvantages of Mezzanine Loan for Borrowers
Just like other financing options, a mezzanine loan offers advantages and disadvantages for borrowers.
The advantages for a borrower with a mezzanine loan are:
• Access to the capital they need to expand their business or purchase a new one.
• Minimize equity dilution and borrow more than a traditional bank would be willing to lend without having to trade a significant amount of equity.
• Interest payments can be tax-deductible.
• Have a variety of repayment options regarding interest payments: with cash, add to the loan balance, or provide equity-like instruments to lenders.
• Appears as equity on a balance sheet, which shows lower debt levels and makes it easier to qualify for other financings.
That being said, there are also some disadvantages to using a mezzanine loan. We will look at those below:
• If things don’t work out as planned, a borrower may face consequences, including substantial debt.
• If a borrower defaults on the loan, they may be required to provide equity interest to the lender.
• A mezzanine lender may set certain criteria that must be met.
If you are a business owner and want to expand your business or acquire another one, a mezzanine loan may be an option for you. However, you must weigh the advantages and disadvantages before making a decision. Contact Triport Lending today, we will be happy to help you decide what is best for you and your business.