In business as well as property lending, there are many ways of raising needed capital. Mezzanine financing is one such method that aids in bridging the gap between traditional bank lending and the real amount you need. This is usually procured as an unsecured debt to the borrower, thus the mezzanine finance rates are a bit higher. Risk is also a higher in some cases.
Mezzanine finance rates can run as high as 30% due to the lack of needed collateral. As a consequence, if the borrower happens to fail to repay the loan, the lender may take actions against said borrower. In the case of business, the lender may take stock in the company or part ownership. For residential borrowers, the lender may seize the property in lieu of the principal plus the mezzanine finance rates.
In general, mezzanine finance rates are charged at a rate of about 2.5% per month. The loan is amortized as usual, but the interest causes the principal to decrease slowly. As usual, borrowers end up paying a large amount of the finance rates at the beginning of the loan, so you may find that you pay the installments for a much longer time or term. At the end of the term, there is normally what is called a balloon payment that finishes off the principal and the accrued interest to that point.
Since mezzanine finance rates are higher than usual and include more risk, this type of financing is typically seen at the tail end of a transaction. In other words, mezzanine financing is not a good option at, or immediately after, the startup. The idea is to use this financing at the point where the venture is established, as in an IPO. The infusion of cash gives the owners more leverage to push their company, product or service to the open market.
As stated earlier, mezzanine finance rates, though high, can be used as part of a residential transaction as well. Even though there is no collateral laid out in the agreement, the property is still on the block in the case of borrower default. An example of when to consider mezzanine finance rates for this purpose is when flipping an investment property that has a buyer all lined up.
If, as the seller, you needed to rush and get the property completed and renovated, you might think about mezzanine financing. The added interest (somewhere around that 2.5% per month) can be added to the buyer’s down payment or to the final selling price to cover your interest cost. That way, you do not end up taking an additional expense in the form of the mezzanine finance rates.