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Mezzanine loans are popular among established business owners looking to expand their company. This type of loan is especially useful for a leveraged buyout, as it can be used in order to generate growth capital.
A mezzanine loan works in a manner in which stocks in the business are traded for financing. That way if the borrower does not pay the loan back on time or in full, the lender can take partial ownership of the company in exchange. Mezzanine financing is the flexible layer between equity and senior debt and acts as a bridge between these layers of capital. Mezzanine lenders are focused on cash-flow lending and therefore hold a steady market.
While this type of financing does generally carry a high interest rate, it is one of the lowest-risk loans because of its convertibility, since it is considered a company asset.
Mezzanine loans are also beneficial to business owners because it is seen as equity in a bank’s eyes, so they have the possibility to gain even more financing from banks. The downside of this type of loan is that only businesses with established reputations receive mezzanine financing.
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