If you study the topic of money, then one of the most interesting aspects is such a direction as the types of financing. Here you can learn about the many possibilities of using funds. As part of the article, we will consider mezzanine financing.
general information
What is meson financing? In another way it can be called as indirect. Its essence lies in the fact that money is provided literally “under” parole. That is - without collateral.
What attracts investors in such cases? The most important aspect is the high return on equity in this case. In addition, here the investor does not assume the risks that accompany direct investment. And besides this, there are a number of advantages. What else is there?
Benefits of Mezzanine Financing
Here is a short list:
- For the subjects of financing, the advantage is that they can receive money when they do not have enough security or if they simply do not meet financial requirements in order to attract a standard bank loan. There may be some other reasons, but nevertheless, the listed ones are basic.
- Equity is less eroded. This is true for companies with high growth potential, since it makes them more expensive.
- Owners retain control of the company. The investor’s interest is not concentrated in making stocks as expensive as possible, but they receive the planned income. Therefore, their lesser activity is observed, which positively affects management. Although the mezzanine investor is often provided with the opportunity to influence the adoption of key decisions.
- You can also respond positively to the settlement system, which is quite flexible.
Negative aspects
Alas, it has already happened in our world that where there are positive aspects, there are negative ones. These include:
- The complexity and high cost of registration (when compared with financing from banks). This situation has arisen due to high rates, as well as due to the fact that each transaction is individually structured.
- Limitations on the possibility of early withdrawal of investors from participation in the enterprise. This is especially true for small and medium-sized economic entities that do not have debt security.
- There are also strict requirements regarding the reporting, transparency and management team of the borrower.
These are the negative aspects of a mezzanine loan.
How is everything going?
An important role in this scheme is played by the
investment bank. This financial institution may use several basic instruments or combinations thereof. In addition to the mezzanine loan itself, money can be provided if certain conditions are met.
Initially, let's consider the first option as the most common. In such cases, a certain amount is provided, which the lender previously transferred to the investment bank, and he already - to the subject of economic activity. In exchange, he receives the right to retain property. An important institution is the guarantee, which can take many forms. As a rule, the delivery period is up to ten years, during which mezzanine financing is provided.
An example of such interaction can be given by pointing to the many large companies and corporations that now operate in the United States and Western Europe. Despite the riskiness, this approach is popular due to the fact that it brings a profit of 12-45 percent per annum.
In our conditions, it may seem that this is not very much, but do not forget that it is in dollars and euros. In our country, in more or less stable banks, getting even a minimum of a minimum is not possible in many places. This advantage has mezzanine financing.
Other tools
In addition to the option considered above, financing can be carried out with the so-called registration of secret participation. In such cases, the investor receives a certain share of the company, but it does not extend responsibility to other creditors. This state of affairs is not disclosed to third parties. And participation in profits, losses, control and management is carried out on a confidential basis.
A common financing tool through the issuance of convertible bonds. This provides for the payment of fixed interest and repayment of the debt with the possibility of the investor acquiring a part of the company to which the money is issued. Moreover, a certain conversion price is set in advance. Also, the condition for granting money may be the issuance of preferred shares, which give a pre-emptive right to profit and assets in comparison with other owners.
Conclusion
And what still attracts investors in such cases? Despite the fact that these are rather risky enterprises, lenders are not averse to participating in the development of promising subjects of economic activity. Many of them aim to not only receive interest rates that significantly exceed the inflation rate, but also to gain access to the shares of companies with good prospects. After all, they are most interested in their own good future. Therefore, they turn to people who specialize in this.
And for companies, especially small and medium-sized companies, this approach has the advantage that, after bargaining, they can get very good conditions, according to which, the loss of profit will be temporary. Then all rights will return, and it will be possible to develop at full strength, realizing its potential.