In the world of business, expanding your holdings can be a worthy but challenging effort. One major roadblock to expansion can be raising the capital to buy a new building or an existing operation, especially when funding from traditional lenders might be difficult to obtain. However, there are other options available, such as mezzanine borrowing. While this type of financing may require a few prerequisites, it also has a variety of benefits for both you and any lenders who choose to finance your business.
- Finance a Variety of Needs
One of the greatest advantages of mezzanine borrowing is that it can be used for a variety of funding requirements when you want to expand your business. Growth capital, management buyouts, recapitalizations, shareholder dividends, and strategic acquisitions may all be arranged with mezzanine financing. This can be particularly advantageous if you are planning for more than one expansion plan, as you may be able to obtain all the funding you need without taking out multiple loans.
- Reduced Paperwork
Mezzanine loans can provide you with greater freedom as a borrower because of their nature. They usually require very little paperwork or collateral, which means the transactions can be performed seamlessly and without the waiting periods other business loans might require. As a result, you can make purchasing decisions more quickly.
These loans can also be simpler for the lender, as since mezzanine borrowers typically run successful and profitable businesses, there is little to no need for due diligence. The absence of this time-consuming process can allow the lender to move forward with the deal with greater efficiency, which may be an advantage when it comes to handling larger loans.
- Buyouts Can Attract Superior Lenders
If you are involved in a buyout, using mezzanine lending can be helpful, especially if the business you are buying is already successful. In the case of this type of financing, the existing business must be profitable to attract viable lenders, but this also means that you might attract a small but elite circle of financers as well.
For example, if you want to buy a local restaurant that generates several hundreds of dollars in profit each year but cannot afford to put up all the money the current owner is asking for, a mezzanine lender who is experienced in this type of transaction can offer the remaining capital owed, plus interest. Depending on the nature of the loan and how much the lender is offering, you may get a lower rate than what be offered by a bank.
- Flexible Interest Payments May Be Available
Some successful real estate moguls, such as Peter Foyo, built their companies through investments and directing private equity firms on the conditions and terms of the loans they provide. This type of guidance may benefit you, as some mezzanine lenders might include flexible interest payments to ease the pressure of monthly costs. This type of option is known as a payment-in-kind toggle note and can be useful to you as the borrower, especially in the case of a financial emergency.
For example, if an unforeseen circumstance causes you to come up short on a monthly interest payment, you can defer the cost by adding it to the overall balance of your loan. This may help you avoid fees or a loan default; however, it is important to keep in mind that you will have to pay this extra money when the bond matures, and deferment payments may include their own interest fees as well.
There are many different strategies you can use to find the funding you need to expand your business. While mezzanine loans may be difficult to obtain, they have a variety of advantages for you as a borrower, unlike like those you might at a traditional lending service.
