Mezzanine Finance is a kind of loan that a company borrows a higher rate of interest but has a longer time to pay back the loan. Business owners can borrow a larger portion of capital needs and a normal loan. People prefer to use Mezzanine financing when they exceed their limits of loans from banks. This is actually highly risky. Interest rates are double when you compare them with average loan rates. Mezzanine finance is generally used by established companies in order to improve their business. Mezzanine loan lenders often work with successful business owners who want to expand their businesses. So if you want to use the Mezzanine loan, you must have a business that is already profitable.
What is Mezzanine Loan?
Let’s tell about the Mezzanine loan in a more detailed way. As we said, it is a form of financing that is a mixture of debt and equity. When the lenders give loans, they receive equity interest rates from the loan users. When a business owner needs a loan but banks or other traditional lenders don’t give all the money they need, Mezzanine financing moves in. Mezzanine loans have high-interest rates but flexible repayment plans. So, it can be tempting for people while doing some investment.
What are the Interest Rates and How Is Repayment?
Mezzanine loans have higher interest rates than traditional loans. Furthermore, loan lenders sometimes demand equity. The repayment procedure can change according to your agreement. If you fail to repay your loan, you can lose your assets like buildings, types of equipment, etc.
What are the Advantages or Disadvantages of Mezzanine Financing?
Borrowing loans always have lots of pros and cons. When you think of its benefits, it is really useful to develop your business but when you think of its drawback, it can be compelling. Mezzanine financing’s benefits are here for you;
• You can access the capital you need easily.
• You can minimize equity.
• You have more flexible interest payments.
• You have multiple repayment choices.
Besides its benefits, Mezzanine financing has some disadvantages. Here are some of them;
• You can face with unexpected financial problems.
• You have a risk of equity loss.
• Lenders can control you and your business.
What is the Difference between Traditional Loans and Mezzanine Financing?
Traditional loans are always firstly preferred ones and it is more secure than Mezzanine financing. When you use Mezzanine financing, the lender of the loan has a direct right to the owner of the loan. It is also a blend of loan and investment. It means this kind of loans carry more risk. Besides its risks, multiple repayment options attract loan users’ attention.
Are Mezzanine Loans Safe?
People generally ask his question. We can say that all the loans and finance activities have their own risks. Mezzanine financing has its own risks but benefits. At this point you should try to balance. Generally, Mezzanine finance is thought as unsecure because of higher interest rates. However, it is your choice whether you will take this risk or not.