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Mezzanine finance combines debt finance, where you repay a loan at an agreed interest rate, with equity finance, which involves diluting some of the ownership of your business by offering equity to the investor.
This type of business financing is commonly used to grow established businesses or to fund large projects. Mezzanine finance can also be useful in a management buyout scenario and for supporting property development projects.
Mezzanine funding is typically an effective solution when a company cannot secure finance via a standard business loan, but where directors don’t want to go down the equity finance route and give away any control of their company.
With this form of finance, businesses may be able to obtain the higher level of financing that they need but as it’s a hybrid of debt and equity funding, if they’re unable to repay, the lender can receive an equity share in the business.
Mezzanine funding is provided as a business loan but the debt isn’t cleared in the ‘traditional’ way. Sometimes it’s repaid as a lump sum, but if the borrower cannot repay once the pre-agreed term comes to an end, the debt owed converts to a shareholding for the lender.
In other scenarios, profit sharing with the financier might combine with the interest payments to make another hybrid borrowing option. So what are the advantages and potential drawbacks of mezzanine financing?
Advantages
Disadvantages
Mezzanine funding is complex and it’s important to understand whether it’s right for your company. Our team at UK Business Finance can ensure you opt for the most suitable financing for your needs and will make an application on your behalf.
A mezzanine finance application will need to be supported by a range of financial documents, including three years of business bank statements and tax returns, information on any existing debt, your balance sheet and profit and loss statement, and a detailed business plan.
For more advice on mezzanine finance, please get in touch with one of the team. We’re an independent business finance brokerage with a wealth of experience industry-wide and offer a free, no-obligation service to our clients.
We work across a wide range of sectors throughout the UK, providing specialist advice to each sector.
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