Mezzanine financing offers a way for publicly and privately held companies to attain financing without going public and potentially ceding ownership of their company. It is a blend of traditional debt financing and equity financing, reaping some benefits of both. Like equity financing, mezzanine financing is an unsecured debt, requiring no collateral to be put up unlike traditional bank loans. Like debt financing, it is very fluid and does not necessarily involve giving up an interest in the company.
This type of financing relies on very high interest rates in the 20-30% range to make it profitable. Unlike a bank loan, mezzanine financing does not hold real assets of a company as collateral; instead, lenders offering mezzanine financing have the right to convert their stake to an equity or ownership in the event of a default on the loan.
Mezzanine financing is a particularly appealing form of liquidity for owners of privately held companies. It is traditionally understood that a privately held company simply cannot achieve the same sort of fluid capital flow as a publicly held company, but mezzanine financing offers a way to balance that situation without going public. In addition to the fact that financers do not retain an interest in the company except in the event of a default, there is also the important consideration that they actively do not want an interest in the company. While traditional equity investors are often striving towards some level of control, a displeasing thought to many private owners, with this type of financing, one can rest assured that the financers will do what they can to ensure you pay off your debt without resorting to default.
Because of the lack of real collateral, as well as the high speed of lending, mezzanine financing is typically more difficult to receive than a traditional bank loan or equity financing. A company must demonstrate an established track record in its industry, show a profit or at the very least post no loss, and have a strong business plan for future expansion. Because of these limitations, this type of financing is not for every business. For businesses looking for a quick injection of capital to grow their already successful business, without giving up an interest, mezzanine financing can be an ideal solution.