Mezzanine Financing Video Investopedia
Mezzanine Financing Overview
This section provides an introduction to mezzanine financing, explaining how businesses can obtain capital without collateral and the implications of defaulting on loans.
Mezzanine Financing Explanation
- Mezzanine financing allows a business to secure capital through loans without the need for collateral.
- In case of loan default, the lender can convert the loan into an ownership stake by utilizing warrants or options included in the deal.
- Example scenario: Rob aims to expand his soda company but lacks immediate funds. Instead of issuing shares, he opts for mezzanine financing.
Ownership Conversion and Benefits
- If Rob defaults on payments, the lender can convert the outstanding balance into an ownership share as per the loan terms.
- The ownership share obtained can be sold or transferred at the lender's discretion.
- Mezzanine financing enables quick capital generation for expansion without involving shareholders with voting rights.
Risk and Interest Rates
- Lenders charge higher interest rates in mezzanine financing due to minimal due diligence and increased default risk compared to senior debt.