Businesses and firms need funds to actualise their objectives. While you consider the senior debt (loans) you also consider Equity(shareholding) as means of raising funds. However, there is a third option that lies in between the high debt and equity which is mezzanine finance. What is mezzanine finance, what do I need to be eligible to providers or lenders in the UK, what happens when I am unable to meet up with the repayment terms? This guides entails everything you need to know about this means of finance in the UK.
Mezzanine Finance UK
Every company have its financial goals plus objectives and map out strategies on how to achieve these goals. However, most goals cannot be achieved without finance and that is why companies switched to equity or loans in order to raise funds. Unfortunately too, that is not enough, that explains why most large companies go for Mezzanine financing. There are times even the banks and other lenders will not give you all the amount you need to work things out. What do you do at that point? Go for mezzanine financing. It is more like the bridge between your money needs and your regular loan providers. This is because it fills the gap between a company owner’s equity and bank financing.
What Is Mezzaine Finance?
Mezzanine finance is a long-term source of capital that helps companies achieve their growth objectives in the UK. It lies between hybrid senior debt and equity. Mezzanine Finance is a funding source with both loan and equity characteristics. It is a combination of debt and equity financing that allows corporations to raise capital for special projects.
Basically, it allows the lender to convert to an equity stake in the company in the event of default. This is mostly after venture capital firms and other senior leaders have been paid.
What is Mezzaine Finance Used For?
Most of the companies that use mezzanine financing in the UK wants to meet their financial needs. Primarily used to expand existing businesses rather than to fund start-ups, it offers a high yield that lies between 12 and 20 per cent enabling firms to meet their long term financial goals.
It is commonly used for the following;
- Recapitalizations
This may include leverage buyout, shareholders, management buyout and so on.
2. Capital for expansion
3. Restructuring or optimization of the balance sheet
4. Refinancings
5. Acquisitions
6. Property bringing loan
Benefits Of Mezzanine Financing
There are certain benefits of the mezzanine financing method for organisations, let us consider some of these.
1. Long Term Means of Financing
One of the benefits of mezzanine finance is its long term nature. It is a capital that promotes long-term growth with only interest and no amortization for up to seven or eight years.
2. Less External Control
Another benefit that organisations enjoy is that it makes provisions for few external control.
3. Ownership Retention and Control
In many cases, a mezzanine-led recapitalization results in the existing owner retaining majority control of the company, including control of the board of directors, management, and so on.
4. It Gives Room For Flexibility
The mezzanine financing methods is more flexible for possible adjustment. This allows firms to reach their business goals, unlike traditional bank loans.
5. Better Option For Yield
When it comes to yield, it is the best option. It yields more results than equity and senior debt.
6. Invariably Cheaper Than Other Means of Financing
It is less expensive and dilutive than a direct stock offering.
Disadvantage Of Mezzanine Financing
In checking the cons of this means of funding, you consider from two perspectives; The side of the mezzanine finance providers and the company borrowing the debt.
Cons To Mezzanine Finance Providers
The fund providers stand to lose their funds should the company go bankrupt. This is because the fund is considered second debt and will only be paid after the senior debt have been paid in cases of liquidation.
Cons To The Borrowing Company
The borrowing company stand to lose ownership and control they were unable to pay back the high-risk debt. This is because the fund provider will demand equity in exchange for the fund.
In addition to the above, it is a more costly senior debt and comes with a prepayment penalty.
Paying Back Your Mezzanine Finance
Generally, mezzanine finance lenders receive a lump sum one-time payment or payment by interest. Whichever your firm decide to do, you are allowed ownership and control till the term expires.
Mezzanine Finance Risk
As much as you enjoy your ownership control as well as being privileged to run your business, failure to pay back the fund is not palatable. Trust me, you would not want to be in that situation. This is because you stand to lose equity when it happens.
What Happens When A Firm Is Unable To Clear Thier Mezzanine Finance?
when a firm fails to complete or meet up with the designated time of payment, it gives rise to a clause in the lender’s terms. This automatically allows the lender to get equity in your company.
Mezzanine Finance Clause
Normally, a clause is not included in this contract. It arises as a result of a firm inability to clear its payment after the designated time. As a result of this, the mezzanine finance lenders will get equity in the firm in exchange for the money not cleared.
Eligibility For Mezzanine Finance
Before lenders or providers gives you mezzanine finance in the UK, you must meet certain requirements. Some of these areas follow;
1. Limited Liability Company
Any firm that will be eligible for mezzanine finance in the UK must be a limited company
2. Location
Before providers grant you access to the mezzanine finance, you must reside in the UK, Scotland Or Wales
3. Company Equity
Another necessary requirement for accessing this fund is that at least 5% of ownership must be in equity. Although, this varies from mezzanine finance lenders in the UK.
4. Provide Credit Record
You will have to provide your credit record because every one of them will be examined.
5. Properties
All properties both commercial and residential will be put into consideration.
When Do Firms Use Mezzanine finance?
Most Often, businesses resolve to mezzanine financing in cases of high-risk debt. This is when the traditional lenders demand collaterals and they were unable to cover up with the loan amount in question.
Mezzanine Finance Providers
These are lenders who provide mezzanine finance to individual businesses in the Uk. When choosing mezzanine finance providers, critically assess the following;
Commitment And Support
Ensure the lenders are committed to firms’ long term growth process not focused on taking over ownership through equity.
Knowledge And Experience
Make sure your provider is well versatile in knowledge. Well able to provide guides to companies who want to grow their business brands.
Expertise
Borrowing firms should also ensure they borrow their high-risk debt from an expert who has helped other businesses too.
Some Mezzanine Finance Providers In The UK
- Octagon Capital
- Iron bridege Finance and so on
Conclusion
Your business objectives are not over because the banks fail to loan you the exact amount you desire to push them forward. There are other alternatives for funding, and mezzanine finance is one of them.
FAQs On Mezzanine Finance
How does mezzanine finance work?
Mezzanine financing is a hybrid system of financing, that incorporates the features of equity and debt. It gives the lender a right to convert their debt into equity shares, in the event of a default. Mezzanine debt is subordinated debt and is close to being the last to be paid off. It is senior only to equity shares
How do you structure a mezzanine loan?
Mezzanine Pricing & Payment Structure
Mezzanine is most commonly subordinated to senior debt, with maturity occurring a year after the senior debt. It is typically structured to include a mixture of contractual interest – cash and payment-in-kind (PIK)—and nominal equity (warrants).
Who buys a mezzanine loan?
A mezzanine lender is generally brought into a buyout to displace some of the capital that would usually be invested by an equity investor. Mezzanine debt takes up some of the financings that an equity investor would otherwise chip in. Suppose a private equity firm wants to buy a $100 million company.
