Mezzanine Funding - Meaning, Need and Types

Mezzanine funding ?is a type of junior capital between senior debt financing and equity. In short, a means that companies can access capital from. Let’s understand its features in detail.?

Mezzanine funding?can either be defined as a portion of the savings given by private equity, and taking further loans from multiple investors to provide funds for the purchase; or it can be categorized as private equity that come from company’s own savings and then they further take debt from the company itself to arrange the funding. Hence, in this type of funding there is a risk factor, which is much higher and the expectation of benefits is also high.

To understand the significance and basic characteristics of this type of funding, here are some basics related to the concept of Mezzanine Funding:

Definition of?Mezzanine Funding

Mezzanine financing is a mix of debt and equity financing that gives the lender a right to convert it to an equity interest in the company mostly when the capital companies and other senior lenders have already been paid.?

Mezzanine debt consists of equity instruments also known as warrants, which increases the value of the other debts and increases the flexibility while dealing with the bondholders. Moreover, Mezzanine funding is associated with acquisitions and buyouts, this can be used to give priority to the new owners before the existing owners, especially in case of bankruptcy.

Mezzanine funding in India ?primarily bridges the gap between debt and equity financing as it?is one of the highest-risk forms of debt. In simple words, it is superior to pure equity but inferior to pure debt. However, this type of funding is considered promising as it has the capacity to offer highest returns in relation to other debt types. Usually, the rate of interest it receives is between 12% to 20% per year, and at times it can reach upto 30%.

Hence, most of the companies use mezzanine funding in order to provide funds for the growth projects or to help with acquisitions for short and medium time duration. Most of the time, these loans are provided by long-term investors.

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