Mezzanine Financing
Candlefocus EditorMezzanine financing is generally more expensive than standard corporate debt, often paying between 12% and 20% a year. Investors are compensated for this higher risk with higher returns. Additionally, companies benefit from having an additional option when seeking capital.
In contrast to debt financing which offers secured payments, mezzanine financing often carries collateral requirements. This may include a lien on property, a pledge of stock, or an assignment of accounts receivable. These measures ensure that if the borrower defaults, the lender can still recoup their investment.
A form of mezzanine financing is mezzanine funds. These are pooled investments that offer capital to highly qualified businesses in the form of mezzanine financing. Mezzanine funds offer benefits to investors such as a larger pool of investments, reduced risk (due to diversification of investments), and increased liquidity.
Due to the nature of mezzanine financing, both mezzanine financing and preferred equity are subject to being called in and replaced by loans with lower interest rates should the market interest rate drop significantly. For borrowers, this can reduce the cost of financing, though the uncertainty associated with such terms make it an unpredictable arrangement.
All in all, mezzanine financing offers both companies and investors an option to provide profits with an increased return on investment. The hybrid of debt and equity financing provides a necessary cushion between traditional debt and higher risk equity investments.