Mezzanine Financing

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DEFINITION of 'Mezzanine Financing'

A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.

Since mezzanine financing is usually provided to the borrower very quickly with little due diligence on the part of the lender and little or no collateral on the part of the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20-30% range.

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BREAKING DOWN 'Mezzanine Financing'

Mezzanine financing is advantageous because it is treated like equity on a company's balance sheet and may make it easier to obtain standard bank financing. To attract mezzanine financing, a company usually must demonstrate a track record in the industry with an established reputation and product, a history of profitability and a viable expansion plan for the business (e.g. expansions, acquisitions, IPO).

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RELATED FAQS
  1. What factors are most important to mezzanine financiers?

    Mezzanine financing is used as a bridge in capital funding between senior debt provided by conventional financial institutions ... Read Full Answer >>
  2. What are the primary disadvantages of using mezzanine financing?

    For small established businesses, the ability to acquire affordable capital to fund rapid growth and expansion is an ongoing ... Read Full Answer >>
  3. How are mezzanine loans structured?

    Mezzanine loans are a combination of debt and equity finance, most commonly utilized in the expansion of established companies ... Read Full Answer >>
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