Mezzanine factoring or financing is a combination of debt and equity ranking below senior debt but above stock in a business’s capital structure. Due to its high risk, lenders require a high return than senior lenders and a low one than equity investors. However, recently, mezzanine factoring has faced a lot of competition from different types of debt financing like second lien term loans. This has led to mezzanine lenders lowering their interest rates and eliminate or reduce their demand for a warrant.
Uses of Mezzanine Financing
Some common uses of mezzanine debt include;
Growth capital- funds can be invested in equipment purchase, sales, and marketing, facility expansion, or any other aspect that accelerates the organic growth of the business.
Acquisitions- funds are invested in facilitating entry to new markets, acquiring new products and customers, or any other need for acquisition financing.
Management buyouts- funds are used to buy control of the business from the parent company.
Leveraged buyouts- funds are used to reduce equity invested in a transaction.
Shareholder buyouts- funds used to buy out shareholders who no longer wish to be part of the company.
Other uses are recapitalization and refinancing.
Mezzanine Financing Qualifications
Industry-mezzanine lenders usually avoid industries with business models that change from time to time
A stable business model.
The size varies, but they prefer a business with a minimum revenue of at least $5 million.
Both historical and projected growth should be positive
A profitable business
A certain limitation to the company’s existing debts
Some advantages of mezzanine factoring include:
The due diligence process is simple and fast.
Due to competition from other financing options, the pricing terms are improving.
There is no collateral required.
A personal guarantee is not required.
Mezzanine is a good alternative for companies in need of growth capital but is yet to attract investors.
Some disadvantages include:
The business has to be profitable to make the scheduled interest payments
Due to its riskier position in a business’s capital structure, it has a high-interest rate than senior debt.
At times it is hard to estimate the capital cost, especially if a company has significant upside potential.
It is good to understand all the terms and requirements before getting mezzanine financing for your business. that way, you can make an informed choice. If you require some funding, reach out to Northgate Capital Finance to help boost your business.