Useful Things a Company Should Know About Mezzanine Debt

Most brokers and investors don’t really understand mezzanine loans and debt. The business owner has heard of it through an advisor or through their banker, but they still require more information for understanding how such finances or debt can work for them.

Eight things for businesses to know about the mezzanine loans & debt

Mezzanine debt is a multifaceted tool that can drive the growth of any business. Such funds can be used in numbers of ways where the traditional financing fall short. Such debts can be used in a number of ways where the cost of equity capital outweighs the return from a project. There are few things to know about mezzanine loans and debt that can help boost the value of any business organisation.

  1. It does not require a personal guarantee from the owner of the business. It is important to understand that the interest rate charged provide the lending agencies with sufficient return for the risk of the mezzanine loan.

  2. Debt providers are dependent on the management of the company that has borrowed the mezzanine finance. They are not interested in dislodging management of borrower’s company. Debt providers see themselves as patient investors who will precisely work with the management team of the business organization for getting through any challenging times. Duration of these loans is five to seven year maturity dates.

  3. Such loans have a long term focus. The money of the debt provider should be used for building up the profit of the business venture over the first three to four years. The borrower will be able to repay the loan or refinance the loan easily, if he does this successfully.

  4. Debt providers are partial to non-cyclical and stable companies, as their loan/finance is completely dependent on the cash flow of the business venture.

  5. It is almost unsecured by assets and does not have any collateral for protecting the value of the loan provided by the debt providers. Debt providers are placed in the second position beneath the financial agencies/banks in the capital structure of different companies.

  6. Lenders who provide mezzanine finance are concerned with getting back their principle loan balance as soon as possible. Debt providers make their return on investment primarily through the interest rates provided by the borrowers and secondarily through the upside on their warrants.

  7. The loan amount is views by the borrower as multiple of their companies’ EBITDA. The lower the multiple, the better loan amount is received by the borrower. Lenders see the loan amount as risk if the multiples are higher than expected.

  8. Lenders view the creditworthiness of any business through their stability of their company’s cash flow over a period time.

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