Mezzanine financing allows companies to bridge the gap between equity and debt capital. Companies often need quick access to equity capital in order to develop cost-intensive projects. Mezzanine financing is the viable alternative to traditional loans.
Mezzanine loans and equity ratio
The equity ratio is particularly important in real estate financing. Mezzanine capital can help companies raise funds. Even if the bank's credit line is exhausted and the options for using traditional financing instruments are limited, mezzanine financing still provides the company with funds.
What are mezzanine loans?
The word "mezzanine" comes from architecture. "Mezzo" in this case describes the mezzanine floor of a multi-story building. Since mezzanine loans are set between equity and debt on the balance sheet, it is a fair description to apply it to the business world. Depending on how the mezzanine is structured, they are closer to equity or debt.
Mezzanine loans are also referred to as economic equity or mixed capital and are the general term for many alternative forms of financing that replace and supplement equity capital. With mezzanine financing, companies have the opportunity to close the gap between debt and equity capital.
Features of mezzanine financing
Companies can use digital financial instruments (z. B. Use crowd investment) to raise mezzanine loans. You retain full control without having to provide collateral. Because when using mixed capital, the company does not give up shares. Investors only provide funds, they have no say in the matter. In this way, the company retains complete control and freedom of choice. In the event of insolvency, the mezzanine loan has priority over equity, but is subordinate to debt capital.
Mezzanine capital is an essential component of the company's overall financing structure. The largest part is the external capital of the bank. Traditional financial institutions provide a certain percentage in the form of loans. In many cases, however, the bank's credit line is exhausted. The company must provide the remaining funds itself. As a rule, however, the equity capital is already tied up in other projects. Therefore, the company may only be able to raise a little of the required equity capital. The gap between debt and equity must be eliminated. Mezzanine capital is very suitable for closing the financing gap. It allows people to access equity-like funds quickly, thus offering companies the opportunity to use new financing structures.
The advantages of mezzanine loans
Since mezzanine loans are treated as equity on the balance sheet, the balance sheet structure as well as the credit rating have been improved. The liquidity of the company is strengthened. This has a positive effect on the company's valuation and financial flexibility. There is also no capital dilution or loss of assets. Companies reduce the funding gap and create a capital base for new investments. By increasing your own capital, it is easier to obtain bank loans. Mezzanine financing is also flexible in terms of repayment and termination methods. The capital can be flexibly adjusted to the wishes of the company. Companies can apply for mezzanine financing without a mortgage. Investors participate only economically, otherwise not at all. Thus, the company remains independent and can make its own decisions.
The disadvantages of mezzanine financing
Compared to traditional loan financing, the cost is higher. In return, the company receives economic benefits without external capital. There are increased requirements for corporate transparency. In addition, a preliminary capital reserve is often required.
Mezzanine loans offer companies several levels of capital. Nowadays, financing is used not only by SMEs, but also by start-ups. Because of its uniqueness and complete entrepreneurial freedom of choice, it is popular as an alternative financial instrument. Due to improved liquidity and higher equity ratio, companies can act independently from traditional investors. This means that companies have a wide range of financing options, especially during the growth phase.