As an entrepreneur, you must ensure your business does not collapse, mainly due to financial challenges. Fortunately, several funding options are available out there to help you on that side. Acquiring a mezzanine loan is one of the alternatives you have. Nonetheless, you need to understand whether this type of financing will work for your enterprise. If that confuses you, this article will be more resourceful.
Definition of a Mezzanine Loan
This type of funding draws a thin line between debt and equity, allowing the lender to convert it into equity if the business fails. You must understand that this is the highest-risk loan because of the high-interest rates. However, it has its bright side because it brings in some of the highest returns and has flexible repayment periods.
Pros and Cons for You, the Borrower
Various Repayment Alternatives
With a mezzanine loan, you have several options when it comes to repaying it. They include:
-Paying the interest fees using cash
-Giving the lender equity-like instruments
-Including the interest charges on the loan balance
Capital is Accessible
As a borrower, mezzanine loans can be very resourceful when you need funding to expand or to make purchases in your company.
You can enjoy some deductibles in terms of interest payments.
Advantageous to the Capital Structure
If you need your business to qualify for different financing, you must ensure that you show lower debt levels. That is precisely what you get with mezzanine funding because it is listed as equity on your business’ balance sheet.
Lower Equity Dilution
Lenders of mezzanine funding will always ask for a lower amount of equity from you. This reduces the equity dilution you would otherwise have been required to do when taking a traditional bank loan.
High Chances of Equity Loss
As a borrower, if you default on a mezzanine loan, you may be required to give out equity interest to the lender.
Loss of Money
If things do not go as planned, you will lose money and have huge debts.
The above information is enough to educate you on whether mezzanine funding is suitable for your business. Otherwise, contact Rushview Commercial Funding today to better understand how to finance your enterprise.