A mezzanine loan has characteristically higher interest rates than more traditional loans, precisely because it isn’t backed by property collateral. In fact, it is a sort of “makeshift” loan, in that both equity financing and debt financing comprise it – with the added benefit that the loan amount is usually greater than what is feasible with a conventional loan. Let us dial down mezzanine financing to the basics:
What Does Mezzanine Financing Entail?
One of the primary benefits to the mezzanine variant is the ability (in some cases, at least) to forego interest payments currently; the interest is simply fused with the loan principle. Clearly, this can be quite advantageous to businesses in need of working capital and positive cash flow stats. Note that the one exception to this attribute is the case of senior debt; the interest payments on this are due at the regular appointed time.
Another positive is that the interest on mezzanine loans is tax-deductible. This coincides with the fact that the debt incurred is regarded by the IRS as equity instead of cash or cash-equivalents. An extension of this reality is that the business can avoid loan refinancing and use the mezzanine loan to extract equity out of the company, itself.
Lastly, let’s say that you have a business that is looking for ways to grow rapidly. A conventional method would be to provide equity to angel investors, for example; however, sometimes giving up equity runs counter to long-term company plans. In these cases, it may be possible to refinance the mezzanine loan for which you opted, along with senior debt, into a consolidated debt in the future when interest rates are presumably lower.
Mezzanine financing tends to be more complicated than traditional loan types, and it is best that you consult with financial experts before opting for one. Here at Capital Finance Partners, we have experts with collective decades of experience in the broad spectrum of financial topics; contact us today.