Mezzanine financing: between loan and venture capital

6 March 2022

You need capital, but you’ve exhausted the possibilities offered by the bank. You don’t need to resort to venture capital right away. Mezzanine financing gives you the flexibility and freedom of private equity and comes in the form of an ordinary bank loan. There are no interim repayments. And most importantly: you keep full control of your business.

What is mezzanine financing?

Mezzanine financing lies between a classic bank loan and venture capital. It’s a subordinated loan, usually for a period of 5 to 8 years without interim repayments. You pay back the entire loan on the due date at the latest.

When should you choose mezzanine financing?

If you are no longer eligible for a conventional loan from the bank or for an additional loan because the risk of non-repayment is too great. In that case, large companies often resort to public capital markets. But that option is far too expensive for SMEs. Mezzanine loans are used to make large investments, for example, but even more often they occur in the event of takeovers, a management buyout or a switch of shareholders.

With or without warrant

Various forms of mezzanine financing exist. The best known is the subordinated loan. The term ‘subordinated’ refers to the moment when things go wrong. Is your company heading for bankruptcy? In this case the lender is subordinated to the other creditors. Another form is a mezzanine loan with a warrant or option. Are you unable to repay the loan on time? The investor becomes a shareholder in your company. Because the risk is much higher for the lender and you may not be able to give guarantees, the interest rate is much higher than with traditional loans.

Advantages and disadvantages of mezzanine financing

The loan is flexible. No guarantee or intermediate repayments are required. You only have to repay the interest.

The interest is tax deductible and can be deferred. Are you unable to pay the interest on the agreed date? In that case, part or all of the interest may be deferred.

An entrepreneur does not have to sell shares and therefore remains in control of his/her business. This is ideal for family businesses seeking growth capital but who want to remain independent.

You can repay the loan early.

Mezzanine financing is long-term financing. In other words you have time to refinance the capital
The interest rate is high, up to three times higher than the interest rate of a traditional bank loan.

The return, in proportion to the high risk, is relatively low – on average between 8 and 15%. This is primarily a disadvantage for the lenders, but for you it means that lenders are sometimes not so keen on mezzanine financing.

Contact us here for more information or guidance in structuring the bridge between a loan and venture capital.

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