Most business owners view “raising capital” as something that is done when dreams of “going public” are still on the table, or as a start up necessity to take on an “equity investor”.  There is another option or financing source available to the middle market entrepreneur or company, and this financing source is called “Mezzanine Debt.”  Companies must demonstrate a proven track record in their industry, be profitable and have a viable plan for growth.

Mezzanine Debt is a hybrid of debt and equity capital that companies can use to finance the expansion of existing companies.  Mezzanine debt gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time (or in full).   Mezzanine debt is subordinated to debt provided by the senior lender (such as banks and venture capital funds).  

Mezzanine debt can be considered a lower cost alternative for financing and can be used to fund growth for a businesses.  Mezzanine debt usually provides the entrepreneur more access to capital outside their current lenders lending capabilities - as it’s tied to cash flow potential and future growth potential, and has a longer payment period, typically more than 6 years, with interest only payments in the first year.  It is treated like equity on a company’s balance sheet, and makes it easier to obtain standard bank financing. 

In exchange for the payment flexibility, mezzanine funds typically require small equity warrants and a higher interest rate than a standard senior note, however mezzanine funds will typically do the deal without any cash equity contribution, provided your business fits within their industry or lending parameters.  Mezzanine capital gives an entrepreneur an option for raising growth capital without having to give up control of their company.  It is usually provided to the borrowing company quickly, with less due diligence compared to an equity investment.  It is also aggressively priced with lenders seeking returns in the 20-30% range over the life of the investment.

Mezzanine funds typically like the following reasons for the need for capital:

1.   Acquisitions
   

2.   Accelerated growth requires company to have an increase of working capital
   

3.   Buyout of company by the management or another individual
   

4.   Leveraged recapitalizations
   

Learn more about Exploring Financing Alternatives,

Read:

Download the PDF white paper Investment Banking Fees Examined as seen on CFO.com

Visit the Lantern Capital Advisors Website for more information on  Management Buyouts, Leveraged Buyouts, and Raising Capital