Borrowers, who may be lacking sufficient funds for their project or business, may wish to take out a mezzanine finance loan to give them the necessary capital they need to grow their company. Common reasons to use mezzanine finance include for property developments, bridging loans, management buyouts, funding growing businesses, recapitalisation and for organic expansion.
This type of funding may be considered when an opportunity is considered too high risk for a traditional lender or a borrower cannot afford the loan. In this case, mezzanine financing may be viable because it means that the lender also gets equity in the business. So although it may be a high risk investment for the loan provider, the returns could be very lucrative due to the shares they have accrued.
Mezzanine finance is also used to top up existing loans. If a lender has already provided a loan for an investment opportunity but the borrower still needs further funds, lenders may understandably not wish to lend out any more money. However, they may be more inclined to do so if they get a percentage of the potential profits. For instance, they may provide 50% of funds in a loan form, 25% as equity and then the borrower has to put in the remaining 25% of the funds needed.
