Capital is one of the key inputs for productivity. With the advent of credit cards, even regular individuals have begun to depend on financing to live the type of lives they have always dreamed of. But ever since the Great Recession, there has been a dark cloud over the global credit markets. Traditional banks are not lending at the same rates as before, but the demand for money keeps rising. That is why wealthy investors are now offering alternative loan programs, such as mezzanine financing. Mezzanine equity & debt financing can bridge the gap caused by traditional bank limitations on commercial capital.
What is Mezzanine Debt Financing?
What is mezzanine debt? Investopia offers the mezzanine debt financing definition as an alternative form of financing combining debt and equity. Traditionally, capital has been allocated in exchange for equity or debt. While large multi-national corporations can afford the paperwork, publicity and process of raising this type of capital – small- to mid-range businesses might not have the same abilities.
Benefits of the Mezzanine Structure
If a company with senior debt and common equity adds a mezzanine debt fund, the mezzanine tranche is placed in the middle, like a sandwich. Mezzanine capital is junior debt comprised of preferred equity and subordinated debt. Senior bonds are foremost in the repayment hierarchy. Junior mezzanine bonds and preferred equity are next. At the bottom of this hierarchy of repayment priority is common equity. Some companies will start with debt and equity financing to attract traditional banking financing later on. There also may be significant tax benefits to these alternative debt and equity loans.
Record low mezzanine interest rates have made this form of alternative financing more attractive. David J. Link, senior vice president with NorthMarq, recently stated – “interest rates on senior loans are so low that sponsors can blend in a mezzanine piece at a more attractive overall cost of money.” A low-interest mezzanine fund allows companies to add another tranche of funding that is subordinate to senior debt. Mezzanine debt funds are ideal for filling commercial financing gaps that often take place in today’s market.
Mezzanine Debt Funds Include Private Equity
Small- and middle-market businesses can benefit from the mezzanine structure in two ways:
1. Access to new forms of capital
2. More flexible combinations with other capital structures.
Smaller firms might find themselves “crowded out” by the big multinational corporations in the capital pools. Even when they can get financing, they might not have enough to complete their project. Mezzanine providers don’t really care as much about size as about your profitability. Mezzanine lenders want to partner with smart, innovative entrepreneurs who can create the great brands of tomorrow. Mezzanine private equity can provide a junior debt level for expansion, inter-generational wealth transfers and acquisitions. Usually, it is more agile, flexible and responsive than traditional bank lending.
Mezzanine Equity Solutions
Family-owned businesses can kill two birds with one stone with mezzanine financing. The older generation can transfer a portion of debt & equity to the younger generation as the seniors near retirement age. This mezzanine financing can also be used to raise capital for the new projects planned by the younger generation. Mezzanine financing is a very agile, flexible form of capital allowing a business to accomplish a myriad of goals. If you are interested in mezzanine financing, just fill out the form and let the Halo Capital Group set up the ideal mezzanine financing plan for your business.
For more information on our mezzanine loans for real estate projects, see this page.