Mezzanine Financing :
Over the years, mezzanine financing has emerged as a funding
tool that businesses opt for meeting their expansion goals. The
reason for it is the amount of loan available via mezzanine
financing and its placement in the debt’s structure of risk
What Is Mezzanine Financing?
Fundamentally, mezzanine financing is a hybrid
of equity and debt financing. It allows lenders to convert loan
case the borrower fails to repay the debt. Such a right can be
exercised after payment is made to the senior lenders such as
venture capital companies, private equity companies and others.
It is structured in a way so that it includes a portion of
fixed and variable interest. This type of financing is
subordinate to senior debt and is often unsecured.
Lenders can often extend mezzanine finance as a top-up or in
addition to funds. Mezzanine financing enables borrowers to
avail a larger percentage of their capital requirement than most
The said financing occupies the form of preferred stock or
unsecured and subordinated debt. Though its structure is
inclined towards debt, mezzanine finance imitates equity in an
aspect of both growth and performance.
How Does Mezzanine Financing Work?
Mezzanine financing comes in handy when a
business has surpassed its asset-based loans or bank credit
limit. Under this
funding option, the money borrowed has to be repaid through the revenue
The lender loans money to the borrowers to help them meet their
financial requirements. They also earn interest as per
applicable rate on the lent amount. After a predefined time
limit, a portion of the loan amount gets converted into equity
if the entire due amount is not paid off.
Often under mezzanine financing, business
entities also use their company’s equity as security
against the loan value.
Benefits Of Mezzanine Financing:
With the help of mezzanine funds, an individual can buy a
company or expand his/her business venture without opting for an
Other than that, some noteworthy benefits of
mezzanine capital financing include the
Ease of availing loan: Mezzanine loans are
easier to borrow when compared to other conventional loans.
The financing option also provides borrowers with at least 3
times of what a regular lender may offer in terms of the loan
Flexible loan structure: Borrowers avail
loans from multiple sources and the amount borrowed from each
lender is significantly small.
Value creation: The presence of a mezzanine
investor on board is often perceived positively by
shareholders. It helps paint a favourable picture of the
company in the market.
Tax exemptions: Tax deductions on the
interest paid on a loan amount makes it a feasible funding
option for MSME owners.
Control and interference: Company owners
rarely lose control of their firm or its direction under this
financing option. Unless a company performs poorly, mezzanine
lenders rarely interfere.
However, factors such as covenants and a high interest rate
accompanying this funding option are considered as its
shortcomings. Business owners can avoid the impact of both and
seek a more flexible financing option in terms of interest rates
and other lending conditions.
Businesses can also opt for
service from KredX to avail instant working capital to meet
their financial requirements. Since KredX offers a
bill discounting service
to businesses there is no impact on their balance sheet.
Difference Between Mezzanine Financing And Bill Discounting:
The table below offers a fair idea about the fundamental
differences between mezzanine and bill discounting.
Mezzanine financing is a financing
process wherein a business’s equity shares are
leveraged to raise funds.
Bill discounting is the process wherein business owners
raise capital against all
bills of exchange.
It comes in handy to boost growth capital. Also, it
assists in filling the gap between the senior debt and
equity in a company’s capital structure.
It comes in handy to meet immediate working capital
requirements. Further, it helps to boost production and
It suits companies that are beyond their start-up stage
and are planning expansion. Also, those who cannot
acquire capital through other financing options may
resort to mezzanine finance.
MSME owners who need working capital to maintain smooth
business operation find bill discounting a
Type of loan
Intermediate financing option.
Immediate financing option.
Businesses must have a clean credit history, a
consistent track of generating revenue and a functional
plan of expansion through acquisition or an IPO.
Usually, the eligibility criteria are relatively simple
to avail loan against bills receivable. However, it
depends mostly on borrowers’ creditworthiness and
worth of the bills under the scanner.
Businesses looking for quick access to working capital can avail
instant invoice discounting service from KredX within
Example Of Mezzanine Finance:
Suppose Mr. Jaiswal owns a fast food joint. He plans to expand
his venture, but lacks the adequate capital to execute the plan.
Also, he is not keen on trying a conventional equity financing
option. Meanwhile, he decides to opt for
In response to his loan plea, the lenders inform Mr. Jaiswal
that they will need warrants for the loan. Being an unsecured
loan option, Mr. Jaiswal has to agree to the conditions and
requirements set by the lenders.
Subsequently, he avails a loan of Rs. 5 lakh by showing that he
has an annual cash flow of Rs.3 lakh. Unfortunately, Mr. Jaiswal
fails to pay within the pre-fixed term. Consequently, the
lenders take a percentage of his fast food joint and sell it off
to recover the loaned money.
From this example, we gather that the risk of losing out a
significant portion of the equity is high in the case of
mezzanine capital. Business owners can avoid
such risk by looking for alternative funding options like
invoice discounting and fund their requirements easily.
KredX helps businesses raise
at attractive terms and against their outstanding invoices. Get
in touch with us now to learn more about our services!
The reason behind the name can be accredited to
the risk aspect of this debt which lies midway
between secured loans and venture equity. It
resembles the mezzanine or intermediate floor
structure between two others in a building.
It is a mix of both. In mezzanine funding, the
lender extends a second charge loan along with the
possibility to acquire equity if the loan
repayment extends a certain point.
It is usually not secured by assets and is lent
based on a firm’s ability to pay off debt from its
free cash flow.
It is a fund that invests money in mezzanine
finance for growth, recapitalisation, acquisition
or leveraged buyouts.
It is a flexible financing option and has a
significantly high factor of risk. Such a
financing option can be availed without any
collateral, but business owners must meet the
stringent terms that accompany it.
Mezzanine financing does not lead to any charge
creation on borrowers’ assets and is recorded in
their company balance sheet between ownership and
You need to apply for LOCs with an
institutionalised lender. Make sure to compare the
eligibility criteria set by different lenders
It is for companies who have moved past their
start-up phase but are yet to venture towards IPO.
Most established companies planning to boost their
growth capital opt for this funding option.
Mezzanine debt is a part loan and part investment
financing and carries a subordinate charge as
lenders are more prone to risk. On the other hand,
senior debt carries a first charge which makes
borrowers prioritise them over other lenders.
In case of default, borrowers may have to give up
their company equity as an interest to lenders.
Being unsecured, this loan option comes with high
risk and accompanies strict covenants.
Typically the funding option helps generate money
through interest charged on loan value and
exercise of warrants. It also generates money by
selling underlying equity under specific