The idea of mezzanine financing is catching up quickly. Mezzanine financing is a financial instrument that is a combat of equity & debt finance. Mezzanine financing is a debt capital which gives a lender the right to convert to an equity interest in a company. Mezzanine finance is posted as an asset on the company’s balance sheet. Since it is treated as an equity in the company’s balance sheet, it lets the company access the other traditional sources of the finance. In a hierarchy of creditors, the mezzanine finance is a subordinate to the senior debt but it ranks higher than the equity. The mezzanine lender is close to being the last to be paid in the event of things going wrong.
The return that one gets on mezzanine financing, is greater in comparison to the debt finance but lower than the equity finance. It is even available easily to the borrower with almost little to no collateral securities.
Mezzanine financing is used primarily for small as well as medium-sized enterprises, infrastructure companies and real estate agencies.
The Pros and Cons
Mezzanine financing is a relatively new country concept. Before jumping onto it, there are certain pros and cons which one needs to bear in mind before using mezzanine financing as an option for funding.
Advantages
This method offers much greater flexibility in shaping the amortization schedules as well as the rules of borrowing itself, not least specifying the special conditions for repayment.
Most importantly, mezzanine financing gives the business owners the capital they need to acquire another business or to expand to another production or market segment.
The owner of the business rarely loses the outright control of his company or its directions. Unless the company continues to develop and grow, its owners are not likely to face any problems from a mezzanine lender.
Mezzanine lenders can give valuable strategic assistance.
Mezzanine financing raises the value of stocks being held by existing shareholders. But the mezzanine equity would dilute the value of the stocks of the company
The lenders interested in mezzanine financing may be long-term investors as compared to the people looking for making a quick killing.
Disadvantages
The Mezzanine financing is relatively more expensive as compared to the traditional or senior debt arrangements.
The Mezzanine financing might include a loss of control over the business especially if projections don't work out as planned or if the equity part of the borrowing is higher to give the mezzanine lender a greater share.
Arranging to get mezzanine financing can be a difficult and a lengthy process. Most of the mezzanine deals usually take at least three months of time to arrange, and sometimes many deals take even twice that long to complete the process.
Subordinated debt agreements might include the restrictive covenants. Many of the Mezzanine lenders insist on a restrictive covenant; these might include requirements which the borrower is not to lend more money, refinance a senior debt from the traditional loans, or to create an additional security interest in the company's assets collection; covenants might even force a borrower to meet some of the financial ratios—for e.g., cash flow to equity.
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