Reasons to Consider Mezzanine Debt Funding

Reasons to Consider Mezzanine Debt

Mezzanine debt financing, which borrows its name from the world of architectural jargon, is a hybrid form of capital that is sandwiched between senior debt and equity on a company’s balance sheet. Structurally it is subordinated or ‘junior’ in priority of payment to senior debt, but senior to common stock or equity. Mezzanine debt is mostly used by companies seeking growth expansion through acquisitions, recapitalizations, and management and leveraged buyouts.

Key reasons to consider mezzanine debt Funding

Mezzanine debt financing is fast becoming a preferred source of alternative financing in the UK and Europe. Listed below are a few key reasons that make mezzanine debt an attractive source of growth capital.

  • Mezzanine debt can help you gain funding when bank loans are not available: More often than not, companies find it difficult to obtain senior debt. In such cases, a mezzanine loan can provide the much-needed cash for various needs including, acquisition, diversification, the launch of a new product line, etc.
  • Adding stockholders is not necessary with mezzanine debt: Mezzanine lenders have no desire to receive permanent stakes in a company. This makes it extremely attractive to business owners who are keen on retaining majority equity in their businesses.
  • Mezzanine debt funding is highly customisable: Mezzanine funding provides customised solutions to structure coupon, amortization and covenants to accommodate the specific cash flow requirements of the business.
  • Secure more total capital through mezzanine debt: While a company can leverage two to three times its cash flow in senior secured debt, it can raise its total debt to four its cash flow with a mezzanine deal.
  • Collaterals may not be required with mezzanine funding: Mezzanine debt can be suitably structured to avoid using collateral, giving you the ability to expand and increase revenue to pay back the loan over a shorter period.
  • Possibility of an early exit: A mezzanine deal typically lasts for 5 to 7 years with most successful mezzanine deals resulting in an exit in year 3 or year 4, mostly through a refinancing or a recapitalization of the company.

Mezzanine debt financing- An ideal solution for SMEs

Although, companies of all sizes have the option to pursue mezzanine debt financing, it is companies that fall within the SME sector that are most benefited by mezzanine loans. The nature of mezzanine debt financing as a subordinated loan, can work in favor of a profitable small company, which does not want to take on an equity partner since they can afford to pay comfortably the cost of a mezzanine loan. Opting for a mezzanine loan can help the entrepreneur grow his business and achieve his targets by providing the much-needed cash flow the business needs.

When making the decision of whether or not to go with mezzanine debt financing, there is quite a lot to take into account. Attract Capital has 20+ years of experience in helping private companies access mezzanine funding directly from mezzanine lenders. With a proven process and a lender platform of over 100 mezzanine lenders, we can help provide quick sourcing solutions for your mezzanine debt financing needs.

Contact us today to speak to one of our advisors. We will be happy to provide a free consultation.