Advantages of Choosing Mezzanine Financing
This is a type of financing which is sandwiched between the main financing types which are debt and equity.It draws a very thin line between equity financing and debt financing.Mezzanine financing may have several complexities and risks, but it can be an alternative source of capital.Debt financing involves borrowing money from lenders to use it in growing your business.Usually, a lender will provide cash to the borrower, and the borrower will repay the money in regular terms.When these repayments are summed up, they result into the total loaned money, and subsequent interest if any.Equity is another way of getting some finances for your business.It involves selling, or giving out shares to your lenders in the event that you are unable to repay the loans.Whoever buys the shares automatically owns a portion of your business.This implies that, all the shareholders in your business will benefit from the profits just like you, and also suffer from any losses equally.This will help you in avoiding total losses by sharing them with the other shareholders.As a result of this, most capitalists and private developers prefer equity financing to debt and other financing types.You will discover more about the benefits of equity financing which exceeds those from debt financing, which is of less importance.
This product is, therefore, considered the linkage between raising funds for the business through equity financing, and debt financing.This is because, mezzanine financing merges debt financing; which is predictable in nature, with the risks of equity financing- which have potentially high returns.All the mezzanine financial arrangements available have some uniqueness which differentiates them from each other, and avoid any resemblance with each other.The most common arrangement is the conversion of loans to that business’ equity shares whenever the repayment period is over, and no repayments have been made.The business financier is allowed by this arrangement, to assume the equity shares of that company, if the business owner is unable to make repayments at the expected time.Therefore, in case the borrower fails to make loan payments, the equity shares serve as a collateral.Also, this service of financing allows borrowers to obtain greater capital to run their businesses.This is due to the assurance lenders have that they can be able to fully recover their money through equity shares.
Mezzanine financing is usually important because, it provides small and medium business owners with capital, which they can use to grow their businesses.The arrangements resulting into owners giving out a portion of equity shares to lenders, do not lead to the borrower totally losing the majority of the business’ control.As a result of equity shares being given to lenders, the daily decision making processes are not affected in any way.
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