Mezzanine Finance: High level finance without loss of control

It can bring you the level of funding you need while reducing costs.

What is Mezzanine Funding?

Borrowing or ‘debt’ solutions are where you borrow to finance your business plans. They are simple to understand and arrange, but they may not be able to provide the level of funding that you need for a major project.

A common alternative is equity funding. This can provide the scale of funding you need for major growth. There’s nothing to repay because, with equity funding, you are basically selling a share in your business. It can mean losing control of your company – it will certainly mean sharing all future profits with your investors. Equity investors make their return from your growth.

Mezzanine Finance can provide a third way to raise the funds you need. It gets its name because it sits in the middle area between debt and equity finance. A lender will provide the funds you need, secured on the future of your business. They will offer a high level of funding, but you will need to repay their debt and interest charges - if you fail to repay, the lender will have the right to take an agreed proportion of equity interest in the company.

A high level of lending

Because of the security provided by the equity option, Mezzanine Lenders can provide very high levels of finance. Mezzanine Finance can, therefore, often be used to fund strategies such as acquisitions and buyouts, where costs and risks can be too high for borrowing solutions.

If the company was to fail completely, Mezzanine Lending is subordinated debt – this means lenders will only be repaid after Venture Capital companies and other senior lenders are paid. This means that the risk for Mezzanine Funding providers is a little higher, and as a result, the interest rate you pay will be higher too.

When is it appropriate?

Mezzanine providers are a useful source of growth finance in circumstances where bank finance is unavailable. It can allow you to retain your ownership of the business, without having it diluted by new equity investors. It can be used to fund:

• Acquisitions
• Management buyouts
• Expansion plans
• Large-scale property developments where no profit will be seen until completion

How does it work?

There are several types of Mezzanine Loan arrangement. One of the most common is a loan that ‘converts’ to an equity share after a set time. If things go well, the business can pay back the money as if it were a loan. If it can’t, the lender can recover costs through shares in the business that increase in value.

What does it cost?

Every Mezzanine Finance deal is arranged individually, and costs will vary accordingly, but in general, it costs less than conventional borrowing solutions.

Is it right for your business?

Mezzanine Finance can help avoid the loss of control of your business, although you need to be aware that if things don’t go well, your funding partner could retain a share in your business.

It could be better for your cash flow. A loan will require regular, monthly or quarterly repayments, reducing the cash available to the business.

Mezzanine Loans are usually repaid at annual intervals. They can be structured with the bulk of the money repayable towards the end of the life of the agreement. This helps you follow your growth plans with low repayments at the front end of the agreement, with the big repayments when your business has started to grow and make more cash available.

Remember, though, that if you fail to deliver on your growth projections you will still face large repayments towards the end of the term.

Mezzanine providers will take rights on a percentage of the company’s equity. However, this will be a much smaller percentage than would be the case in a conventional Venture Capital or Angel investment.

Management buyouts

Management buyouts and reverse acquisitions are often funded by Mezzanine Financing. It can be the most practical way to raise the level of funds required.

Can you arrange Mezzanine Finance?

To attract Mezzanine Financing, your company must demonstrate a track record in your industry. You should have an established reputation and product, a history of profitability and a viable expansion plan for the business.

You will need to show a business plan with details of growth through acquisitions, expansion or the launch of a new product or division.

Most Mezzanine Finance providers operate at the top end of the market. Funding of up to £3million should be considered as the minimum, and £10million may be more common.

Why you need Rangewell to set up Mezzanine Finance

Mezzanine Finance is a very complicated form of lending that must be arranged on a bespoke basis. Getting the approach that is right for your business demands both expertise in the sector, and a knowledge of the available lenders who might consider working with your business.

Our service is personal. We can work with you to discuss your funding options, and if Mezzanine Funding can provide the solution you need, we can work with you to help set up the solution that is right for you.