Mezzanine finance requires borrowers to give up equity in their development project or business, whereas bridging finance is secured against property, and is used on a much shorter term. Both types of finance must also pay interest.
Both mezzanine and bridging loans can be a great to help borrowers in certain situations, carrying different levels of risk, eligibility criteria, repayment plans and more. But how precisely do they differ? And which one is best suited to certain situations and circumstances?
Here, Octagon Capital explores the differences between mezzanine finance and bridging loans, and which one works best in different situations and circumstances.
Mezzanine Finance vs Bridging Loan: Which One Is Right for Me?
Mezzanine finance is used more long-term than a bridging loan, requiring the borrower to give up equity either in their development project or business, while a bridging loan is used on a much shorter-term basis, securing a property against the loan while repaying after a few months (the maximum length of time you can take out a bridging loan with Octagon Capital being 24 months).
Mezzanine finance can appeal to lenders as they not only get paid interest back by the borrower, but also get shares, which could potentially be more valuable than a standard repayment by the borrower. Mezzanine finance lenders has been designed to accommodate for ventures that are potentially riskier, with funding available for a range of borrowing periods – from a few months to 10 years.
Mezzanine vs Bridging Loan: Uses
A bridging loan in London can be used for a variety of different purposes, but essentially helps to “bridge” the financial gap for borrower’s between the purchase of a property and the sale or influx of money from somewhere else.
In comparison, a mezzanine loan is used when the borrower can’t afford the loan, or the opportunity is considered too high of a risk for other types of lending. Mezzanine finance can be used to top up an existing loan, to help fund a business project or to help grow a company. While it’s high-risk, the lender could potentially reap the rewards of enormous returns via the shares they’re given.
Mezzanine vs Bridging Loan: Eligibility Criteria
As mezzanine finance and bridging finance operate differently, the eligibility criteria for each type of loan will also differ greatly.
To obtain mezzanine finance through Octagon Capital, applicants will have to meet the following criteria:
- Must offer equity of up to 20%
- Must be based in the U.K., Scotland or Wales
- Must be a limited company
- Adverse credit histories considered
- Both commercial and residential properties considered
Bridging finance in comparison will require applicants to meet the following eligibility criteria:
- Minimum borrowing amount of £50,000
- Must have an exit strategy
- Residential, commercial, mixed properties and HMOs considered
- Must be over 18
- Must be based in U.K., Scotland or Wales
- Adverse credit histories considered
These two types of finance operate differently and will therefore have differing requirements and expectations for eligible borrowers to meet.
Mezzanine vs Bridging Loan: Repayments
Mezzanine finance is paid through both investment/shares in the borrower’s company as well as in cash or PIK (payment-in-kind) interest. Bridging finance is paid either once a sale has gone through on a property or the borrower manages to refinance with something longer term.
The interest for bridging finance is charged per month, however, borrowers have the option to pay this back either monthly or to “roll up” these repayments and pay back the loan in full at the end of the loan term.
How To Find Mezzanine Finance with Octagon Capital
Octagon Capital are a U.K. licensed credit broker, working with a number of reputable mezzanine finance lenders.
We’ve worked on a big range of projects, and are able to advise you on how best to approach your borrowing needs.
To get started, simply call us on 0333 414 1491 or email us at sales@octagoncapital.co.uk, and speak to one of our dedicated team members to explore your options.
