What is mezzanine financing?

If you study the topic of money, then one of the most interesting aspects is the direction, how types of financing. Here you can find out about many possibilities of using the funds. We will consider mezzanine financing within the framework of the article.

general information

What is meson financing? In other words, it can be called indirect. The essence of it is that money is provided literally "under" the word of honor. That is - without collateral.

What attracts investors in such cases? The most important aspect is the high profitability of capital in this case. In addition, here the investor does not assume the risks that accompany direct investment of funds. And besides this, there are a number of other advantages. What else is there?

The advantages that mezzanine financing has

Here is a short list:

1. For funders, the advantage is that they can get money when they do not have enough collateral or they simply do not meet the financial requirements in order to attract a standard bank loan. There may be some other reasons, but still, the listed are the main ones.
2. Less diluted share capital. This is true for companies that have high growth potential, as they make them more expensive.
3. The owners retain control over the company. The interest of the investor is not concentrated in the fact that the most expensive shares became more expensive, but they received the planned income. Therefore, there is less activity, which positively affects management. Although the mezzanine investor is still often given the opportunity to influence the adoption of key decisions.
4. It is also positively possible to respond to the settlement system, which is quite flexible.

Negative aspects

Alas, but so it was already in our world that there where there are positive moments, there are also negative ones. These include:

1. Complexity and high cost of registration (if compared with financing from banks). This situation is due to high rates, as well as due to the fact that each transaction is individually structured.
2. Limitations on the opportunities for early withdrawal of investors from participation in the enterprise. This is especially true for small and medium-sized entities of economic activity, who do not have security of debt.
3. There are also strict requirements regarding the reporting, transparency and management team of the borrower.

These negative aspects have a mezzanine loan.

How does it all happen?

An important role in this scheme is played by the investment bank. This financial institution can apply several basic tools or their combinations. In addition to the mezzanine credit itself, money can be provided under certain conditions.

Initially, let's consider the first option, as the most common. In such cases, a certain amount is provided, which the creditor previously transferred to the investment bank, and he already - to the subject of economic activity. In return, he receives the right to withhold property. Important is the institution of surety, which can take many forms. As a rule, the term of the grant is up to ten years, for which the mezzanine financing is being carried out.

An example of such an interaction can be cited, pointing to the many large companies and corporations that now operate in the US and Western Europe. Despite the riskiness, this approach is popular, thanks to the fact that it brings a profit of 12-45 percent per annum.

In our conditions, it may seem that this is not very much, but do not forget that it is in dollars and euros. At us in more or less stable banks to receive even half of a minimum a little where it is possible. This advantage has mezzanine financing.

Other tools

In addition to the option discussed above, financing with the so-called registration of an implicit participation can be carried out. In such cases, the investor receives a certain share of the company, but it is not liable to other creditors. This state of affairs is not disclosed to third parties. And participation in profits, losses, control and management is carried out on a confidential basis.

Distributed and the instrument of financing through the issuance of convertible bonds. This provides for the payment of fixed interest and debt repayment with the possibility of acquiring an investor part of the company, which is given out money. And a certain conversion price is set in advance. Also, the provision of money may be the issue of preferred shares, which give priority to profits and assets in comparison with other owners.

Conclusion

And what does attract investors in such cases? Despite the fact that these are rather risky enterprises, creditors are not averse to participating in the development of promising subjects of economic activity. Many of them are aiming at not just getting interest that significantly exceed the level of inflation, but also gaining access to shares of companies with good prospects. After all, they are most interested in their own good future. That's why they turn to people who specialize in this.

And for companies, especially small and medium-sized companies, such an approach has the advantage that, after bargaining, they can get very good conditions, according to which, loss of profit will be temporary. Then, to return all the rights, and it will be possible to develop at full strength, realizing its potential.