How Does Mezzanine Finance Work?
In normal circumstances, when a lender provides a loan to a business, there will be an agreed amount determined and then lent over a predetermined time frame over which time the borrower will repay the loan amount plus interest and it is the interest that provides the lender with their return.
When it comes to equity investors, they will pledge an amount of money to the business requiring funding in return for a percentage stake in the company, having assessed the growth and profit potential of a business. It is the success of the business over time that provides their return in these cases. The investor may either receive share profits from the business or they may sell of their shares at a profit.
Mezzanine finance though, tends to be secured as a second charge loan on a property and can be useful for property investors that need that bit extra to push ahead their business in a way that may otherwise be impossible. When it comes to this type of finance it is important that you have a tried and trusted team on hand to ensure that you can secure the best loan available on the market.
With mezzanine loans, the lender will provide the funding the borrowing business requires. However, there will also be a clause in the agreement that if the loan is not repaid within the agreed timeframe, the lender receives equity in the business to act as repayment for the outstanding loan and interest amount.