Hybrid of Debt and Equity Financing
Mezzanine financing is a hybrid of debt and equity financing. It is generally used to finance the expansion of existing companies. Basically, it is debt capital, with current repayment requirements, but with rights to convert to an ownership or equity interest in a company.
It is generally subordinated to debt provided by senior lenders (such as a bank) and is referred to as subordinated debt. Mezzanine financing is advantageous in that, on the balance sheet of a company, it is treated like equity and may make it easier to obtain standard bank financing.
Mezzanine financing, being a hybrid of debt and equity financing, is generally not collateralized. Often, there is a repayment obligation with mezzanine financing. It may also be riskier than debt financing and therefore is not generally available with standard commercial lenders.
Mezzanine financing is typically found with venture capital companies or alternative lending institutions seeking a higher rate of return. Most companies providing mezzanine financing are looking for returns of 20 percent or higher.
To attract mezzanine financing, companies usually must demonstrate:
- Track record in the industry, with established reputation and product;
- A history of profitability, or, at a minimum, breaking even;
- A viable expansion plan for the business, whether through acquisition, broader penetration of the market, etc.