Mezzanine financing meaning – Simple definition

Mezzanine financing explained - Welcome to Get Mezzanine FinancingIf your company or real estate project need financing beyond bank loans and you would like to consider other options than issuing new equity then this page is for you. Mezzanine financing meaning is explained here in plain English.

For us and for the whole Get Mezzanine Financing community, we focus on understanding, preparing for and arranging mezzanine financing. We see that this form of intermediate capital is useful in bringing our businesses to the next level in terms of growth, development and ultimately success.

Our belief in helping you get mezzanine financing is simple: Share the truth, be honest, work hard, and consult leading experts in the field. That’s what we’re all about, and that’s what Get Mezzanine Financing is all about.

Common uses of mezzanine financing

Mezzanine capital is often used to extend the borrowing capacity of a company or a project in situations where more external financing is needed than what banks are willing or able to offer. At the same time, the shareholders of the company are not willing, for whatever reason, to dilute their own stake by selling more shares to other external investors. This means that mezzanine financing is typically used in at least these three broadly defined cases:

  1. When a company is pursuing strategic growth opportunities. This includes both organic growth and through acquisitions.
  2. Another type of situations in which mezzanine loans are used is shareholder transitions. This category includes wide range of situations ranging from one family generation handing over business to the younger generation all the way to MBOs (Management Buy-Outs) and MBIs (Management Buy-Ins).
  3. Finally, mezzanine capital is heavily utilized by Private Equity firms to further leverage their own equity when taking over new companies. Mezzanine is added as another layer of capital on top of bank debt.

To quickly evaluate if mezzanine financing is suitable for your company, you can go straight to the article titled Mezzanine financing example uses and investment criteria. If you’re not ready to dive deeper into the examples just yet, then read on to find out more about what mezzanine financing is.

Mezzanine financing explained in plain English

Mezzanine financing is a type of capital that has some of the characteristics of bank loans and some of owners’ share capital.

Typically it is structured as a loan, though in such a way that it doesn’t make primary lenders (that is banks) uncomfortable. This is achieved through often very low¬† cost of servicing that loan during the early years of the financing. Specifically, this means little or no principal repayments, as well as interest payments.

During that period the company taking on mezzanine capital is expected to grow or, at least, improve its cash flow generating ability and also equity value.

The mezzanine firms expect to eventually earn from the interest that is paid later on and, often, participate in some way in the shareholder benefits resulting from the increase in the company value.

Mezzanine financing meaning – What mezzanine financing is NOT

1. Mezzanine financing is NOT free money

Despite what it might seem at first, mezzanine financing does cost money. Even if there is an interest-free period, eventually you have to pay that interest. Whether as actual cash payments or in the form of equity in your company, you will need to compensate the mezzanine fund for providing capital to your company. Equally, the initial loan might not be amortized until it is due after some years later, but sooner or later it has to be returned.

2. Getting mezzanine financing is NOT easy and it takes work to obtain it

Many mezzanine financing companies are committed to quick turnaround with their analysis, due diligence and funding decision. Yet, this does not mean that their answer will be positive. The mezzanine lenders are there to stick around with your business for years to come and they want to make sure the partnership they are about to enter will be a fruitful one. This means that you have to put a lot of work and effort to ensure success in mezzanine financing.

3. Getting mezzanine financing does NOT happen overnight

Along the same lines as the answer to the previous question, even if your company and the situation it faces is a perfect match for mezzanine financing you cannot expect to get financing immediately. Mezzanine finance firms typically have been in their business for decades or, at least, their key staff has. Therefore, they know that thorough due diligence and prudent approach to lending are the keys to success for them. This means that they want to do their homework before signing on the dotted line.

4. Getting mezzanine financing is NOT impossible

Every year hundreds of millions, if not billions, of dollars are provided to companies globally in the form of mezzanine capital. As long as your company fulfills the investment requirements of, at least some of the mezzanine firms, and you are willing to put effort into identifying them and presenting your story in compelling way you can access this form of capital. It is all about hard work and efficient communication.

Key stages in mezzanine financing life-cycle

Breaking down the mezzanine financing process into more manageable steps is one of the objectives of Get Mezzanine Financing. To focus your efforts on the right things in the right time, we suggest looking at the process of arranging mezzanine financing step-by-step. The key stages in the process are:

  • Need/suitability identification
  • Preparation
  • Approaching mezzanine finance providers
  • Information exchange and negotiations with selected mezzanine firm(s)
  • Closing of the transaction and on-going relationship

The best starting point to evaluate if mezzanine financing is right for you is our Q&A page – is mezzanine financing for me?