In order for a business to grow and expand, they often have to take on a series of projects that are larger or more comprehensive than they usually handle. However, although doing this is advantageous, business owners may be held back from expanding due to lack of funding. When this occurs, business owners may be faced with a variety of different financing options. However mezzanine financing may be a good option in many situations.
What is it?
Mezzanine financing is a type of financing that is typically used to fund the expansion of existing operations. When it is used, the business owner gives the lender the right to take over ownership of a portion of the company or equity interest if the loan is not paid back on time or in full.
This type of financing is also untraditional. For instance, when a business owner desires to acquire a loan through their bank, the go to the lender, make the request, and go through an approval period. In comparison, mezzanine funding differs because it can often be obtained very quickly and usually does not require the consumer to put down any collateral on the loan.
Mezzanine financing is used in a variety of different ways for a multiplicity of projects depending on the needs of the business owner. For instance, this type of financing is often used to relocate business assets to diversify an owner’s holdings. In many situations, business owners find that their worth is stagnated by their company because a majority of their capital is held strictly by the business. With this type of financing, owners can fund a one-time dividend that allows them to diversify their holdings.
Additionally, business owners often used this type of financing to fund a transition of ownership. In this situation, many owners view the only way to personally liquidize their company is through selling it. While this often is an advantageous solution, this type of financing can provide business owners with a way to liquidize their company without needing to sell it.
Although these two situations are common ways business owners use mezzanine financing, the most prevalent way it is used is usually to fund projects. This can be particularly advantageous when the owner needs capital but needs it very quickly and does not have very much collateral or capital to spare. For example, if a construction company owner recently landed an account to build a large apartment complex but needs to purchase a specialized set of tools to complete the project and must start immediately, this type of financing could provide them with the capital they need to complete this project successfully.