Who is Mezzanine Finance For?
Mezzanine finance can be the right option for those looking to develop a high-risk, high-potential project. It can be a way to borrow a large amount of capital in the short-run with flexible repayment. Depending on the project, it is worth considering all options including bridging loans, development finance and speaking with expert investors.
Am I Eligible for Mezzanine Finance?
Before deciding whether mezzanine finance is the right choice for you, it is worth checking whether or not you are eligible to receive it.
The eligibility criteria for mezzanine finance with Octagon Capital are the following:
- You must be based in UK, Scotland or Wales
- Must offer up to 20% in equity
- All properties considered including commercial and residential
- All credit histories considered
- Must be a limited company
What are the Advantages of Mezzanine Finance?
For companies looking to borrow money, there are many benefits to mezzanine financing. Not only does it provide them access to capital, it can often mean borrowing more money than traditional loans can offer. Borrowers can also minimise their equity dilution rather than trading a substation amount of equity for capital.
One of the key benefits of mezzanine financing is flexible repayment for borrowers. There are multiple options available including cash, adding to the loan balance or providing equity for the lenders. It also allows them an element of flexibility when presenting debt as they are able to list mezzanine loans as equity on their company balance sheet. Additionally, interest payments can be deductible to the business.
What are the Drawbacks?
Like any loan, there is always a financial risk. Mezzanine financing is typically synonymous with high interest rates. As such, businesses may be faced with big debts in the case of company failure. One of the conditions of mezzanine loans is that if borrowers are unable to make repayment in cash, they may have to recompense lenders with equity interests. Because this type of financing is a high risk for lenders, it means that lenders can set high interest rates or make other specific demands.
How Much Does Mezzanine Finance Cost?
Mezzanine loans can be more expensive than traditional types of borrowing, interest rates typically starting at around 12% per annum.
However, the true cost of a mezzanine loan will vary from borrower to borrower, depending on the circumstances and the details provided during the loan application.
If you want to find out more about mezzanine finance, including the costs involved you can call us on 0333 414 1491 or email sales@octagoncapital.co.uk.
Lender Perspective: Is it a good idea to provide mezzanine financing?
One of the biggest advantages for lenders is the high interest rates associated with mezzanine financing. To balance out the high risk, it means that the eventual pay out can be very high. Additionally, lenders could potentially receive equity. If a business succeeds, this could be hugely profitable for the lender.
Despite the pros, it is important to note the high risk nature of this type of financing. Whilst lenders are always at risk of losing money to default, this is especially true for mezzanine loans. Additionally, the fact that they are considered “low priority” loans means that, in a worst case scenario of bankruptcy, lenders risk never being repaid.
