What is a mezzanine loan (and how does it differ to a bridging loan or equity finance)?

27 Nov 2019 by Top Tier Bridging Loans

Mezzanine Loan, financing

If your company is looking for a short-term loan, you may be considering two options: bridging or mezzanine finance.

In a nutshell, a bridging loan is a short-term loan with a set interest rate and agreed repayment time period, all of which is based purely on the value of the property. A mezzanine loan is similar, but with the proviso that if the money cannot be repaid within a certain timeframe, the lender can then convert the debt into equity in the company. With a stake in the business, lenders understand that their repayments will then be over a longer time period.

Mezzanine loans are unsecured and will always take second place to a bridging loan which, in this case, would be termed the ‘senior debt’ in terms of repayment obligations. If a company goes out of business, repayment of a mezzanine loan would take second place to repayment of all other loans.

Due to their complexity, mezzanine loans can take anything between three and six months to set up, so they are not an option if your company needs financing quickly. And, because of the increased risks involved, the lenders therefore require higher interest rates on the loan, which could well be in excess of 15% per annum.

What are mezzanine loans used for?

Typically, mezzanine financing is used for complex business deals, usually management buyouts. But they can also be useful to help with the growth of successful smaller businesses that already have an established reputation and a solid business plan.

In some cases, rather than property, a mezzanine loan uses company shares as collateral. As the business grows, the lender will get a greater return on their investment, and are therefore sometimes more willing to lend greater amounts than for a bridging loan or other forms of ‘senior debt’.

Mezzanine loans are also used in addition to other funding to give companies a greater amount of money to use on big projects.

Still got a question with regards to what mezzanine loans are used for? Get in touch!

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