Mezzanine Financing enables companies to acquire funds from creditors with little or no security. Generally, they are obtained for expansion related job. It can also be acquired for modernization, acquisition, merger, issue of IPOs, etc Though they are shown as equity in their balance sheet, they are actually a hybrid of debt and equity capital of a company. The amount financed by way of mezzanine financing is basically lend as debt capital. But in this case, the lender has the right to convert it into an ownership or equity rights is the amount that he has lend is not repaid back in full or in times.
Mezzanine Financing for Quick Funds
Mezzanine Financing allows for quick accumulation of funds in need as the lender extents the money with minimum diligence and little or nil security. But with the quickness and easy of availability, comes a price. Lenders often charge very high interest on the amount advanced and the interest rate may often go up to 30%.
In the interest or claim settlement structure, it is placed at quite low priority and is given preference only above common shares. An arrangement fee is also charged by the lenders, which is levied at the completion of the transactions.
So, we can infer that though mezzanine financing is able to arrange funds immediately on demand, the cost of availing It is too high.
Everything comes with a price and so does the mezzanine finance. This type of loan is quick but then the interest rate and on account of insolvency lies just above in priority to the common share holders. The only best thing about it is there is usually no delay in obtaining it.