{"id":876,"date":"2012-06-22T05:00:28","date_gmt":"2012-06-22T12:00:28","guid":{"rendered":"https:\/\/masonmyers.com\/?p=876"},"modified":"2015-01-28T12:58:45","modified_gmt":"2015-01-28T20:58:45","slug":"mezzanine-financing-business","status":"publish","type":"post","link":"https:\/\/masonmyers.com\/mezzanine-financing-business\/","title":{"rendered":"Mezzanine Financing &#8211; A Guide for Business Owners"},"content":{"rendered":"<p>Mezzanine financing is a type of debt financing that sits between bank loan financing and equity financing in a company&#8217;s capital structure.\u00a0 This post is meant to be a general overview of mezzanine.\u00a0\u00a0 I recommend that all business owners should know about this financing option because it may be useful at some point.\u00a0 There are pros and cons to every financing option available, and mezzanine debt financing is no exception.\u00a0 You may want to utilize mezzanine financing to make an acquisition, to buy-out another owner, or for growth capital.<\/p>\n<p>As with most financial terms, the term &#8220;mezzanine&#8221; can mean different things to different people &#8212; to me it means debt financing that is subordinated to bank loans.\u00a0 The observations below are generally for companies with between $1 million and $3 million in EBITDA &#8212; larger companies will receive different (usually better) terms.<\/p>\n<h2>Mezzanine Financing:<\/h2>\n<h3>Pros:<\/h3>\n<ul>\n<li>A financing option to bridge the gap between equity and senior debt (bank) financing.\u00a0 Banks typically want strong tangible assets and receivables and often personal guarantees.\u00a0 Equity is expensive to give up.\u00a0 Mezzanine fits in between these two options.<\/li>\n<li>Less pressure on cash flows because the mezzanine debt typically is non-amortizing (interest only payments, no principal payments) until the 5-year mark when the entire principal is due.<\/li>\n<li>Mezzanine lenders typically have more of a partnership mentality than bank lenders (your results may vary!) because they recognize the ebbs and flows of business results and panic less than bank lenders.<\/li>\n<li>Mezzanine loans are subordinate to senior bank loans.<\/li>\n<li>You can receive between 1 and 3 times your company&#8217;s EBITDA in mezzanine financing (for low EBITDA companies), but this depends upon the amount of senior debt ahead of the mezzanine and other factors.<\/li>\n<li>Less expensive than equity.\u00a0 The cost of equity for smaller, private companies will usually be quite high (&gt; 20%+ returns) which suggests that mezzanine financing is less expensive than giving up equity.<\/li>\n<\/ul>\n<h3>Cons:<\/h3>\n<ul>\n<li>Expensive interest.\u00a0 Mezzanine lenders can charge between 10 and 14 percent cash interest with maybe some additional non-cash interest (payment-in-kind or PIK that adds to principal) or equity warrants on top of the cash interest.<\/li>\n<li>Big payment in year 5.\u00a0 Because the company is not required to make principal payments along the way, the company needs to be prepared to pay off the principal in year 5 or refinance the debt.<\/li>\n<li>Restrictions and covenants.\u00a0 You have another voice at the table when making decisions about your company.\u00a0 And, the mezzanine lender will institute covenants regarding your total debt amounts, cash flows, and more than you need to comply with during the term of the loan.<\/li>\n<\/ul>\n<h3>Common Terms:<\/h3>\n<ul>\n<li>Cash Interest of between 12 and 14 percent annually.<\/li>\n<li>Non-cash interest (additional to principal, or PIK &#8212; payment-in-kind) or warrants or a combination.\u00a0 This can be another 4-5% PIK, so the all-in interest can be as high as 17% or more.<\/li>\n<li>Warrants or some equity participation.\u00a0 The mezzanine lenders are usually looking for some more participation in the upside of the company if it does well, so they are often asking to purchase some equity or to receive warrants to give them more upside potential.\u00a0 Warrants are an option to purchase equity at a specified price, so the mezzanine lender will exercise if the company increases in value and their warrant is in the money.<\/li>\n<li>Prepayment Fees.\u00a0 There will usually be prepayment fees as the lender does not want you to pay off the loan quickly &#8212; they want the chance to earn the interest that they expect.\u00a0 The prepayment fee will usually decline over time.<\/li>\n<li>Subordination.\u00a0 Mezzanine will be subordinated to senior loans, usually from a bank, but will obviously be senior to equity.<\/li>\n<li>Closing fee.\u00a0 Closing fees can be high, such as 2%, because mezzanine lenders are usually SBIC lenders (small business investment company) and they need to pay a closing fee back to the US government and they want to cover that fee (at least, that&#8217;s the story they tell me!).<\/li>\n<\/ul>\n<p>A high percentage of mezzanine lenders participate in the US government&#8217;s <a href=\"http:\/\/www.sba.gov\/inv\">Small Business Investment Company<\/a> program which is different than the SBA loans that you may be familiar with.\u00a0 In this program, the mezzanine funds raise $1 of private capital and can usually get another $2 of capital from the SBIC program.\u00a0 And, the capital from the SBIC program usually only costs a little more than the 10-year US Treasury Rate.\u00a0 So, if their capital costs 3% and they are lending at 14%, they can usually make a good return for their partners.<\/p>\n<div class=\"postmeta_wrapper\">\n<div class=\"postmeta classifications small\"><span class=\"post_categories\">Categories:<a href=\"https:\/\/masonmyers.com\/category\/financing-funding\/\" rel=\"category tag\">Business Financing &amp; Funding<\/a>, <a href=\"https:\/\/masonmyers.com\/category\/sell-a-business-or-buy-a-business\/\" rel=\"category tag\">Sell or Buy a Business<\/a><\/span><br \/><span class=\"post_tags\">Tags:<a href=\"https:\/\/masonmyers.com\/tag\/buy-a-business\/\" rel=\"tag\">Buy a Business<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/buying-a-business\/\" rel=\"tag\">Buying a Business<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/financial-strategy\/\" rel=\"tag\">Financial Strategy<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/financing\/\" rel=\"tag\">Financing<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/investment-terms\/\" rel=\"tag\">investment terms<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/mezzanine-financing\/\" rel=\"tag\">Mezzanine Financing<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/mezzanine-lenders\/\" rel=\"tag\">Mezzanine Lenders<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/sell-a-business\/\" rel=\"tag\">Sell a Business<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/selling-your-business\/\" rel=\"tag\">Selling your business<\/a><br \/><\/span><\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Mezzanine financing is a type of debt financing that sits between bank loan financing and equity financing in a company&#8217;s capital structure.\u00a0 This post is meant to be a general overview of mezzanine.\u00a0\u00a0 I recommend that all business owners should know about this financing option&hellip; <a class=\"more-link\" href=\"https:\/\/masonmyers.com\/mezzanine-financing-business\/\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6,11],"tags":[131,57,84,47,32,135,136,87,25],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Mezzanine Financing And Funding, Financial Strategy | Mason Myers Business Blog for Owners, Investors<\/title>\n<meta name=\"description\" content=\"Well schooled in financial strategy, business owner and investor Mason Myers offers keen insights into mezzanine financing &amp; funding on his business blog.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/masonmyers.com\/mezzanine-financing-business\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Mezzanine Financing And Funding, Financial Strategy | Mason Myers Business Blog for Owners, Investors\" \/>\n<meta name=\"twitter:description\" content=\"Well schooled in financial strategy, business owner and investor Mason Myers offers keen insights into mezzanine financing &amp; 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