Welcome to professrsavings.com, we teach finance basics.
Today we will teach you what is mezzanine financing in about two minutes.
Mezzanine financing allows a business to obtain capital through loans and the great this is no collateral needs to be offered.
Let’s say that Professor Savings opened an ice cream business and defaults on the loan since he has not been getting enough business. After all, it has been raining over eighty percent out of the year.
If the cupcake bakery defaults on the loan, the lender can convert the loan into an ownership stake by exercising warrants or options built into the term sheet.
For example, Professor Savings owns five after school finance tutorial school and wants to to build five more schools.
Professor Savings lacks the funds to do so. Instead of raising money by issuing shares of his company, he finances his expansion through a mezzanine lender who agrees to loan the money to the professor.
But under the condition that the lender receives options.
Lets say that the professor default or can’t pay his payments based on the terms of the loan, the lender will convert the outstanding balance into an appropriate ownership share.
That share can be sold or transferred at the lender’s freedom.
Through mezzanine financing, a business owner can quickly generate capital to fund expansion without having to create shareholders. This can get messy with different owners and voting rights that need to be laid out.
But beware. Lenders will charge highis interest rates to account for the risk of default due to the minimal deposit involved.