What Is a Mezzanine Loan?

A mezzanine loan is a short-term debt that you take as a bridge between first-round financing and senior debt. Primarily used by corporations, this type of loan is used at the intermediate stages of growth. True start-ups must use venture capital to finance their businesses. Venture capital tends to be very expensive, and often involves a significant surrender of equity by the company’s principals.

Once a company is mature, it becomes eligible for other types of loans. At this stage, the company is deemed credit worthy, usually as a result of operating history and a positive cash flow position. In between these two phases, companies look to mezzanine lenders for capital investment.

What Mezzanine Lenders Offer

Mezzanine loans tend to carry higher interest rates (often as high as twenty percent), but eliminate the need to surrender equity. The higher cost you must pay is a result of the status of the company. It is established and growing, but not yet a solid credit risk at standard market rates. The fact that the company has survived past infancy is why the lender is willing to make the loan without taking equity, but it still demands a higher rate of interest. These loans serve as the bridge from one phase to the next.

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