What Is A Mezzanine Loan Agreement

Like any type of borrowing, mezzanine loans have advantages and disadvantages for borrowers. For mezzanine lenders, they risk losing their investments in the event of bankruptcy. In other words, when a company withdraws from the business, priority debtors are first paid by the liquidation of the company`s assets. If, after the repayment of the priority debt, there are no assets, the lenders will lose in the mezzanine. Mezzanine financing can lead lenders – or investors – to attract equity in a business or warrants for the purchase of equity at a later date. This can significantly increase an investor`s return (MMR). In addition, mezzanine financing providers receive monthly, quarterly or annual interest payments. However, mezzanine loans are not there for everyone. While it is easier than getting many traditional financing options, mezzanine loans often have a high interest rate. For example, it is not uncommon for borrowers to pay 12-20% interest; a high-risk financing option. A mezzanine loan is a financing option combining debt and equity financing elements (hence the name). It is generally considered high-risk debt, although it also offers high returns for the lender.

To learn more about what a mezzanine loan is and whether this type of financing is right for your business, keep reading. Depending on the terms of an agreement, borrowers may have several options for repayment. If cash flow is not available – or if the company wants to reinvest instead of paying interest – companies can capitalize interest called in-kind payments. Borrowers are not alone in dealing with the pros and cons of mezzanine credit. This type of loan structure also has advantages and disadvantages for lenders. I hope this will give them a better understanding of what a mezzanine loan is and how it works. Of course, mezzanine loans are just one of many forms of small business financing. You should familiarize yourself with all the financing options to determine which one is best for your business.