All about Mezzanine Loans

Mezzanine loans are secondary financing usually secured through a private lender after you have reached your financing limits from a senior or primary lender. The private lender may be a hedge fund, private equity group or other investment partner who is looking to share in your profits. Instead of paying a straight interest rate on the loan, you will come to a profit share or equity agreement that allows the lender to benefit as you profit. These arrangements have many positive effects on a company's finances.

Receive Additional Financing

The main reason to seek mezzanine financing is to receive more liquidity than you can through commercial lenders. Commercial lenders do not have much flexibility to evaluate your business plan; they are responsible to investors, and they have to control the level of risk they assume as a result. They will only provide financing up to a certain point. If your business needs more cash, the next place to turn is mezzanine lenders because they are less risk-averse. These lenders are not as concerned over your current financials as they are about future profits. 

Negotiate Flexible Loan Terms

Private lenders will also come in with more flexible terms or no set terms on the loan. Instead, they will be looking to arrange a mutually-beneficial agreement giving you a good chance of success as a business. They make money off of your success, and this allows for a greater amount of cooperation between the borrower and the lender. This is not to say there will be no terms at all; in fact, mezzanine lenders will have a lot to say about what you can and cannot do in the future. The main difference is they are willing to consider a number of alternatives instead of standard loan terms.

Gain Valuable Partners

Making a deal with a mezzanine lender is taking on a partner who will eventually have equity in your company. Some business owners fear this joint venture status because they do not want to cede control. In other cases, though, these lenders become key advisors to the borrower and can assist in many complicated decisions. Mezzanine lenders have usually been involved in successful business ventures previously. They will likely know best-practices and have market insight into a number of potential future moves on the part of the company.

Build Your Financial Status

Because mezzanine loans are typically not secured loans, they appear as increased liquidity on a company's balance sheet instead of debt. This means a company is in better financial status after taking on the loan, which is not true of standard loans. Since companies using mezzanine lenders often have senior lenders as well, this increase in financial health can help negotiate lower interest rates or better terms on those senior loans. When the company attempts to seek additional funding or sell, such as in an IPO, the added equity will mean a more stable business opportunity and a stronger position on the market.