There are two major ways to secure a business loan: with the use of either collateral or by possessing an acceptable credit score/business financials. If you lack the collateral that’s often necessary to acquire a commercial bank loan, then mezzanine financing may be an option for the SMB (small to medium-sized business) that is currently cash-strapped.
How Does Mezzanine Financing Operate?
The gist of it is as follows: in mezzanine financing, the business, itself, serves as the collateral. This means that the financial institution that provides you with the loan is now privy to an equity stake in your business in the event of loan default. The size of this equity will be directly proportional to the amount of money you borrowed.
Why Would You Sign Up for Mezzanine Financing?
Frankly; starting a business is tough because of the startup capital required. Usually, commercial lenders require strong financials to loan you money, and even the federal government route requires very high credit scores if you want competitive interest rates. You probably don’t even possess the assets to qualify you for collateral loans. This is why the mezzanine option can be so attractive to SMBs. Additionally, the road to approval is markedly smoother than when compared to SBA loans and traditional bank loans.
Now for the downside. Mezzanine loans often have sky-high interest rates. Since they have to mitigate the risk of lending to a business that lacks the traditional markers of high success probability. Possession of potential collateral, competitive credit score, and other creditworthiness markers, high positive cash flow, and significant working capital. You can expect interest rates in the stratospheric realm of 12-30%. Unfortunately, these interest rates present a willing juxtaposition with the reality that over 90% of new businesses fail in their initial year.
Ultimately, mezzanine financing is a viable option when you lack other options. It’s always better to seek the low-interest alternatives first to see if you qualify. But those notwithstanding, the mezzanine option is something to consider.
Contact 360 Commercial Capital today.