Mezzanine Loans vs Equity Financing

Mezzanine loans provide funding for a business in order to develop a commercial use for a piece of property. Mezzanine loans are a secondary level of debt referred to as subordinate debt. It is based on an initial loan that was taken out on a piece of property, such as land or a building.  The amount that is available through mezzanine financing

Equity Financing

Equity financing simply involves the use of cash to purchase land or make improvements. The cash is raised by selling equity shares of the corporation in the form of a private or public offering. An example of a private offering is one that is conducted in accordance with Securities and Exchange Commission (SEC) Rule 145. A limited number of non-accredited and unlimited number of accredited investors are permitted to invest in the offering. As long as proper records are maintained on the names and types of purchasers who participated in the offering, there is no complicated registration process.

Public offerings are more involved than private ones and require the assistance of a corporate finance department within a brokerage firm. The brokerage firm acts as an underwriter for the public offering and files the necessary paperwork with the SEC in order to accomplish the offering and raise the financing for the company.

Mezzanine Loans

Mezzanine loans are a subordinated debt financing that is arranged through a brokerage firm or financial company. Mezzanine loans provide funds to a company by leveraging the value of a property and its current or potential income production. A mezzanine loan is a hybrid of equity and debt and as such provides a lender with security against loan default and concedes some of the ownership from the company to the lender. A mezzanine finance arrangement leverages the income and value of the property that is part of the finance package and helps the company borrowing the funds to expand or increase their income opportunities.

The advantages of equity finance is that it does not entail additional debt for the business. The business issues shares of common or preferred stock through a private or public offering. With preferred stock owners will receive dividends that act in a manner that is similar to interest payments made on bonds. With mezzanine loans, the company will have an ongoing obligation to pay back the loan as well as cede some ownership to the lender. Using either methods of financing may be okay depending on the needs of the borrower.