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.
While most business owners are familiar with traditional financing available through local banks, there are many other sources of capital that can meet your needs for growth and expansion.
Equity capital generally is composed of funds that are raised by a business in exchange for an ownership interest in the company. This interest can be in the form of ownership of common or preferred stock or instruments that convert into stock.
In addition to taking an ownership interest in your company, equity investors may also participate as a member of the company’s board of directors and take an active role in managing your company. However, in comparison to debt financing, or loans, which must be repaid over time, equity financing does not have to be repaid.
While equity investing can come from family and friends, it’s often raised from high net-worth individuals or from venture capital or private equity firms. Investors are looking for early stage companies that can’t yet obtain traditional financing; a return on their investment of at least 30-40 percent and a clear strategy to realize their investment within 3-7 years.
What makes a company attractive for equity investment?
The fact remains that the most common sources of funding for start-up, small businesses and entrepreneurs are from personal investment and funds generated through family and friends.
Business owners are reminded to look first at their own personal savings and then leverage of personal assets, such as home equity or investments. Many small business owners get access to additional capital by borrowing from or pledging assets owned by family and friends.
There are many loan products available for your business. As a business owner, you have to find the financial product and service that matches your needs for the growth and operation of your company.
Every lender has unique eligibility and application requirements, but lenders often look for the same basic documentation such as personal and business credit reports, bank statements, financial statements and your business plan.
Despite what the late-night infomercials want you to believe, the federal government does not provide grants for business expansion and growth. There is no “free” money for you to start or grow a business.
Grants.gov is the source to find and apply for federal grants. Grants.gov is a central storehouse for information on over 1,000 grant programs and provides access to approximately $500 billion in annual awards. It does not provide personal financial assistance.