Because the lender takes on a greater risk with this type of loan, mezzanine financing rates tend to be higher than a traditional loan. The key is that lenders are more likely to give mezzanine loans to mid-sized companies because they stand to profit much more than with a traditional loan. If you want to grow your business, but do not have the capital on hand to do so, mezzanine financing might be something for you to consider.
Your lender determines your mezzanine financing rates based on a few different factors. For starters, the lender considers the size of your business and how likely it is to grow over the period of the loan. Your lender will probably look for a return on between 20 and 30 percent on the initial investment, so your rates will reflect that. This, of course, grows substantially if you default on your loan because of how mezzanine loan agreements are written up.
The basic idea is that your lender provides you with the financing that you need, but has the right to turn this loan into an equity loan if you do not repay your debt. This means that the lender can take stock or a percentage of the principle rights to your business if you do not repay the loan on time. Generally, the equity warrant is for between 5 and 20 percent. You will have the right to buy these rights or stocks back at a price that has been set beforehand.
As for the interest, your mezzanine financing rates should stay at around 12 percent over the period of the loan, which should be between five and seven years. In some cases, you can get away without making payments for the first three years, as this gives your business a chance to grow before you have to start the repayment process. The goal is to grow your business, so you do not want to take funds away from this growth too quickly to repay a loan.
In the end, you should look at some mezzanine financing rates to see if this type of loan works for your company. All companies struggle to get to that next level, especially when traditional lenders will not help out. Since this type of financing provides more incentive for the lender if things go wrong, they are more likely to provide these loans. This is much different from a bank, as banks just want their money back as quickly as possible. While mezzanine lenders do require a slightly higher interest rate, it is worth it if it provides you with the funds that you need for success.