The Significance of Mezzanine Capital in Funding a Business
- Author Rose Brazil
- Published May 9, 2011
- Word count 411
Mezzanine Capital, also known as Mezzanine Debt, is a type of liability funding that comprises equity-based option, such as rights and warrants, and a lower-priority debt. It is a hybrid debt matter that is in subordinate to an existing debt, a debt provided by senior lenders such as banks and venture capital investors. It is frequently used in financing acquisitions and buyouts where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs. It basically gives the lender the right to assume ownership of the company if the debt is not paid back in time and in full.
Mezzanine capital is commonly used by companies beyond the start-up phase but before initial public offering or IPO, to fund the last stage of the projects or to fund unexpected operational costs before going public. This unsecured form of funding usually involves attachment of security interest to the stock of a corporation and does not attach a security interest on its physical asset. Because mezzanine debt is unsecured, lenders typically charge a higher interest rate more than on senior debt instruments. For some riskier projects such as real estate business, the interest rate differs significantly. Hence, many companies try to seek other less expensive forms of debts before acquiring mezzanine debt.
Mezzanine debt behaves more like a stock than a debt because of the enclosed options that include stock call options, rights, and warrants. Oftentimes it is an expensive source of funding than secured debt or senior debt. Nevertheless, it is advantageous because it is treated more like equity on a company’s balance sheet and may make it easier to acquire standard bank financing. It does not require collateral and no typical inspections just like in a typical conventional lender, thus, providing the mezzanine capital quickly. However, if the borrower defaults, the lender therefore will be entitled to receive ownership interests in the entire corporation, including all physical assets and liabilities.
Companies who invest mezzanine capital should be profitable. They must have proven track record in their chosen industry with established reputation and product, a history of profitability, and should have a viable expansion plan to draw attention for future mezzanine funding. These are typically what these lenders look for since they offer high return of investment with high risk, and a placement agent is hired accordingly. They are an outside firm who would help market the lender’s fund to institutional investors.
Rose writes articles for Grow-Connect, a platform that matches and connects entrepreneurs with angel investors.
Article source: https://articlebiz.comRate article
Article comments
There are no posted comments.
Related articles
- Non resident Mortgages in Spain
- Effective Strategies for Paying Off Your Mortgage Faster
- How Does Equity Release Work?
- Florida First Time Homebuyer: The Indispensable Guide of Tips, Programs, and Resources
- How to Become Debit Free?
- Sellers Concession the Closing Cost Option
- Financing Short Term rentals with DSCR loans
- Why move to Roseville CA
- Simple Interest Mortgage Advantage
- Are Low Doc Commercial Loans available in Australia
- How to Obtain a Rural Agriculture Loan Quickly and Easily
- What is a Caveat Loan?
- Tips for improving your Credit Score before getting a Home Loan
- 3 Things To Look out for With An Equity Release Mortgage
- Manage your Debts by Refinancing your Current Home Loan
- How to Get a Home Loan with Unusual Employment or Income?
- 20 Effective Debt Consolidation Loans Tips with Bad Credit
- Tips for Choosing a Non Conforming Lender
- Why is a Good Credit Rating Important in Australia?
- Most Common Ways That People Fall Into Personal Bankruptcy
- How to Choose a Consumer Credit Counseling Agency?
- Consolidate Your Debts and Take Control of Your Finances
- How to get a Home Loan due to a Bad Credit Report
- Debt Consolidation Home Loans are a Solution to Multiple Debt Problems
- Facts You Should Know About Low Doc Home Loans in Australia
- No Doc Loans from Private Lenders
- Home Loans to Consolidate Debt for People with Bad Credit
- How Can I Get a Mortgage If I Have a Bad Credit History?
- Guidelines to Fix Bad Credit Effectively Through Dispute
- Dealing with Debt – What to know about Debt Consolidation