As businessmen have difficulty in obtaining
access to their capital, market situations have compel them to think about
mezzanine financing as a way of funding for the growth needs of business.
Investors of mezzanine bridge the gap in capital required but not offered by
various other sources. Mezzanine financing is actually debt capital that allows
lender the right to change to an equity interest in the organization, if the required
money is not paid back in that time period. Mezzanine financing is preferred
equity or subordinated debt or combination of two. Typically, it is not secured
and sits back on the balance sheet between equity and senior debt. Mezzanine
investors tend to organize the notes in order to fit the company’s operating,
financial and cash flow needs. Also, the terms are of 5-7 years and no
amortization is required. This flexibility permits the management to make use
of the proceeds for investing in R&D activities, acquisitions, working
capital assets, market expansion, or just seize the capital in order to take advantage
of upcoming opportunities.
As the investors are unsecured, they
usually don’t involve in a considerable risk as they believe that loan repayment
must be paid from future cash flow of the company. Unless the organization
generates enough cash flow, their investment might not get paid again within
the desired terms and it may also be possible that if the organization is not
giving profits. Consequently, expected returns might range between 20%-30%
which can be costly. However, this financing source may act as bridge until the
business owners refinance with cheaper funding options. As the investors
continuously look for better opportunities with the organizations that have showed
performance operation, strong management teams as well as business plans.
Mezzanine Financing as Funding Option
For Startup Business
If a business owner is looking for funding
options for his startup business, then he must consider mezzanine financing. Typically,
mezzanine financing is a loan that is offered to quickly to the borrower as
well as it is hybrid of equity and debt financing. From the lender’s point of
view, this source of financing falls between investing and loaning and in
certain cases can be best of both worlds. On the other hand, from borrower’s
perspective, business come across financial difficulties, the lender of mezzanine
financing is the last to be repaid. Several other types of debt such as
subordinated, senior subordinated and senior debt get priority over mezzanine
loans. This financing source is not ideal for funding startup businesses but a
good for funding those companies which are well established and do profitable
business. Generally, these types of lenders leave out due diligence segment of
loan reviewing application, and in response they look for higher interest rate.
Furthermore, it has been observed that when
the lender gets equity in the organization, it is unusual that the business owner
loses control. Also, if the company starts growing in the next few years, the
business owner may think about buying the lender out. Meanwhile, the company
gets advantage from the trade acumen of the lender. Savvy lenders are now comfortable
in gaining equity in order to earn interest as they believe that mezzanine
lending is the better way to diversify. However, for several other lenders, the
main aim is not to take over a business, but to understand big returns after
debt repayment.
Moreover, it has been observed that many
business owners are attracted to mezzanine financing as it can be easily obtained.
For qualifying, an organization doesn’t require a desirable product, an
established industry reputation, a business plan and a history of making profit
that illustrates the growing ability in the coming years, such as releasing new
product, acquiring company of competitors or new territory expansion. So, while
searching for mezzanine financing such as sources like private investors,
mutual funds, banks, pension funds, and insurance companies. Also, mezzanine
financing provide solutions for business owner’s requirement for cash to increase,
or a method for investors to expand their portfolio and it is a trendy way to
finance growing and profitable companies.
So is your business suffering from Funding problems? ALCOR MNA is experienced in finding the best Investors for companies and small businesses. We provide a broad spectrum of comprehensive fundraising solutions to cater the capital requirements of different companies across industries.
Are you looking for a Financing Options?
For additional information on how we can help you finance your Company, Complete the Enquiry form. One of our representatives will contact you within one business day.
Are you looking for a Financing Options?
For additional information on how we can help you finance your Company, Complete the Enquiry form. One of our representatives will contact you within one business day.
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