✅In this video, we discuss about what is mezzanine financing, And also the structure, disadvantages and advantages of Mezzanine Financing.
What is Mezzanine Financing?
Mezzanine financing is nothing but a kind of financing that has both features of debt and equity financing that provides lenders the right to convert its loan into equity in case of a default (only after the private equity companies and other senior debts are paid off)
Mezzanine Financing Characteristics
1. Mezzanine Financing is for companies who have moved beyond start-ups.
2. Mezzanine Financing is a pretty flexible form of financing.
3. Mezzanine Funds are pretty risky.
4. As Mezzanine Funds are unsecured, lenders restrict the borrowers in certain cases
Mezzanine Financing Example
Mrs Marry has an ice-cream parlour. And she wants to expand her business, but she doesn’t wants to go for the conventional equity financing. Rather she decides for mezzanine financing.
Mrs Marry goes to mezzanine financiers and asks for mezzanine loans.
But the lenders mention that they need options or warrants for this loans. Since the loans are unsecured, Mrs Marry has to agree to the terms set by the lenders.
So Mrs Marry takes $200,000 by showing that she has a cash flow of $50,000 every year. She takes the loan and unfortunately defaults at the time of payment since her Beauty Parlour couldn’t generate enough cash flow.
The mezzanine lenders took a portion of his beauty parlour and sold off to get their money back.
Some Advantages of Mezzanine Financing
1. Can get loan easily from mezzanine financing
2. The structure of mezzanine financing is flexible.
3. Interest on the mezzanine financing is tax-deductible
Some Disadvantages of Mezzanine Financing
1.The mezzanine lenders incorporate restrictive conditions on the borrowers.
2. The borrowers need to pay quite a high interest rate and if you have not been earning half of what you intend to borrow.
If you want to know more about Mezzanine Financing here: https://www.wallstreetmojo.com/Mezzanine-Financing/
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