Mezzanine financing fills the gap between high priority debt and equity. Typically, it will be structured as unsecured debt of preferred stock and offers investors a chance to convert to equity interest. This type of financing is typically used to fund acquisitions, expand the business, and fund growth prospects.

Mezzanine Rate of Return

Mezzanine financing is either preferred stock or unsecured debt. Typically, it comes with a higher risk and investors require a high rate of return. Usually, investors get paid 12 to 20%, which is higher than the average rate of return on ordinary debt. Returns can be earned through:

Cash interest
Payment-in-kind interest
Participation Payout
Arrangement Fee

Mezzanine Financing Benefits

There are several benefits to this type of business financing:

Issuer Benefits

The issuer, or business owner, receives the following benefits:

Total capital increase
Reduced capital costs/increased equity returns

Investor Benefits

The investor receives the following benefits:

Attractive/safe investment
Warrant option

Limitations of Mezzanine Financing

While it is true that there are benefits for both the issuer and the investor, there are also some limitations to this type of financing.

Issuer Limitations

The limitations for the issuer are as follows:

Increased probability of failure
Possible loss of control/freedom

Investor Limitations

In addition to the limitations for the issuer, there are some limitations for the investor:

Higher risk
Long wait for return on investment

Mezzanine financing does offer higher returns that can be collected in several different ways. This type of financing is becoming more popular because it allows the business to secure the capital they need. Finally, it does come with the option to allow the investors to earn equity in the business- but that means the existing owners will be diluted because of the extra shares that are out there. Contact New Horizon Capital Funding today to learn more about mezzanine financing solutions.