Advantages of Choosing Mezzanine Financing
Mezzanine financing brings together debt financing and equity financing.In other cases, it eliminates the boundary between debt and equity financing.This type of financing is often considered risky and complex, but it can be an option for you to get financing for your business.Debt financing basically involves borrowing money for some reasons, mostly in form of loans.Normally, money lenders will give money to business owners as loans, and the borrowers are required to pay back the money once, or at intervals depending on existing terms.The resulting sum of all the repayments is the total amount of money borrowed, and some interest amount if there was to be any.Equity is another way of getting some finances for your business.This type of financing involves obtaining funds from selling business shares, or giving out the company’s shares to money lenders, in order for them to serve as a collateral for the loan.Anyone who buys or assumes shares through unpaid loans, will have an automatic ownership of the business.This implies that, all the shareholders in your business will benefit from the profits just like you, and also suffer from any losses equally.You will be sharing costs, expenditures and profits.As a result of this, most capitalists and private developers prefer equity financing to debt and other financing types.It has a very high risk, but has more benefits compared to debt finances.
Mezzanine financing is thus considered to be the middle way between debt financing and raising funds through equity.Mezzanine financing combines the two aspects of financing, i.e. the predictable debt financing with the risk of equity financing, which have a great potential of providing higher returns.All the mezzanine financial arrangements available have some uniqueness which differentiates them from each other, and avoid any resemblance with each other.The most common arrangement is the conversion of loans to that business’ equity shares whenever the repayment period is over, and no repayments have been made.The business financier is allowed by this arrangement, to assume the equity shares of that company, if the business owner is unable to make repayments at the expected time.Therefore, in case the borrower fails to make loan payments, the equity shares serve as a collateral.Also, this service of financing allows borrowers to obtain greater capital to run their businesses.This is because the lender is assured that he will recover all the amount loaned out.
Mezzanine financing is, therefore, important because small and growing businesses are able to obtaining funds to boost their growth.The arrangements resulting into owners giving out a portion of equity shares to lenders, do not lead to the borrower totally losing the majority of the business’ control.Even if some equity shares will be given out to the lenders, the business owner is still able to make day-to-day decisions without any interference.
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