Mezzanine Debt for Business
What is mezzanine debt and how can it benefit my business? A common question from many a business owner. While not well known, mezzanine debt is a multifaceted tool that can drive the growth of a business. It can be used in a number of ways where bank loans fall short. It can also be used in a number of ways where the cost of equity capital outweighs the returns from a project.
Mezzanine derives its odd sounding name from the position it occupies in the balance sheet. Sandwiched between a bank loan above it and a layer of equity below it, mezzanine resides in the middle layer of a capital structure. Despite being stuck in the middle, it is quite an evolved and intelligent species. It thinks likes an investor with a long term view on growth, yet acts like a lender with a watchful eye on downside risk. To know what mezzanine debt is and what it can do, it pays to first define what it is not. It is not an equity investment.
It does not own shares in your company and will not tell you how to run your company. It is also not venture capital nor is it a bank loan. It is not angel investment nor private equity or even convertible notes. It is a long term loan to a business that provides funding to grow, acquire or transfer ownership. The creditworthiness of the borrower is measured through the stability of its historical cash flow or EBITDA. The size of a mezzanine debt loan is determined by taking historical cash flow and applying a multiple to it. Often the multiple is between 3.0 to 4.0 times historical EBITDA.
It can be used to fund all sorts of business initiatives or owner initiatives such as new product or new market expansion, business expansion, business acquisition, dividend or bonus to the owner, or to pay off of other loans or liabilities. It can also be used in a buyout context where the mezzanine debt is used to buy shares of the business from the owner. So why is mezzanine debt not widely available to all businesses in your specific region? Well the industry has always been more focused on funding buy-outs than on funding companies directly for growth reasons.
This has led to each mezzanine debt firm having a national as opposed to a regional focus in their new business focus. Mezzanine debt, while not cheap provides great value for money to a business. There is no personal guarantee and the principal repayment is deferred for several years. It will fit neatly into your business by going below your existing bank loan in a subordinated position.
The simple truth is that it brings good things to life through unleashing business growth. While most think of debt as a growth inhibitor, mezzanine debt understands and solidly embraces growth as its primary goal. By funding beyond the boundaries of bank lending, mezzanine debt provides that precious layer of risk capital so vital to the success of US economy.
Mezzanine derives its odd sounding name from the position it occupies in the balance sheet. Sandwiched between a bank loan above it and a layer of equity below it, mezzanine resides in the middle layer of a capital structure. Despite being stuck in the middle, it is quite an evolved and intelligent species. It thinks likes an investor with a long term view on growth, yet acts like a lender with a watchful eye on downside risk. To know what mezzanine debt is and what it can do, it pays to first define what it is not. It is not an equity investment.
It does not own shares in your company and will not tell you how to run your company. It is also not venture capital nor is it a bank loan. It is not angel investment nor private equity or even convertible notes. It is a long term loan to a business that provides funding to grow, acquire or transfer ownership. The creditworthiness of the borrower is measured through the stability of its historical cash flow or EBITDA. The size of a mezzanine debt loan is determined by taking historical cash flow and applying a multiple to it. Often the multiple is between 3.0 to 4.0 times historical EBITDA.
It can be used to fund all sorts of business initiatives or owner initiatives such as new product or new market expansion, business expansion, business acquisition, dividend or bonus to the owner, or to pay off of other loans or liabilities. It can also be used in a buyout context where the mezzanine debt is used to buy shares of the business from the owner. So why is mezzanine debt not widely available to all businesses in your specific region? Well the industry has always been more focused on funding buy-outs than on funding companies directly for growth reasons.
This has led to each mezzanine debt firm having a national as opposed to a regional focus in their new business focus. Mezzanine debt, while not cheap provides great value for money to a business. There is no personal guarantee and the principal repayment is deferred for several years. It will fit neatly into your business by going below your existing bank loan in a subordinated position.
The simple truth is that it brings good things to life through unleashing business growth. While most think of debt as a growth inhibitor, mezzanine debt understands and solidly embraces growth as its primary goal. By funding beyond the boundaries of bank lending, mezzanine debt provides that precious layer of risk capital so vital to the success of US economy.
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