Using Mezzanine Loans to Finance Your Development
Mezzanine loans are referred to as subordinated debt or financing; in fact some companies list it as one of the assets in their business. This rarely used method of financing is a new found gem for property developers largely because it is not asset based as other conventional loans but generally capitalizes on how much cash your company is able to generate.
This form of financing is extremely flexible because the lenders are more concerned with their overall yield, they go a long way in helping you make strategic plans that will improve business proceeds. In addition, they have years of experience in the industry. They will do more than get you loans, they will also help with business advice. The mezzanine lenders are very liberal in tailoring their investment to meet the financial, operating and long term cash flow needs of the borrower. So getting yourself into such a deal will help you achieve your development business goals in the near future.
Mezzanine financing is an effective and provocative way for developers that have moved beyond start up status but do not yet have big cash to finance big growth moves themselves or traditional lending arrangements; it raises growth capital for firms that are way beyond the start up mess but are not yet far to reaching the top. So if you have been having big dreams and plans for your property development business, it’s time to stop dreaming and go “mezz”.
The amount of money you can raise from mezzanine loans is quite attractive.You can leverage up to two times or more of your stable cash flow, depending on your lender. This means that if you are making 2 million on the cash flow, then you may acquire 4 million in return and progressively more in the future. As compared to mortgages where you may never get up to a hundred percent in loans not to mention the sizeable down payment, the mezzanine financing for property development is much more appropriate.
The mezzanine funds do not require amortization during the time of the debt. This is very important. It means that you can use the increased cash flow to pay pending debts, invest in working capital, product development or to accumulate cash on the balance sheet for future opportunities.
The flexible nature of the mezzanine loan is a great advantage to your development business as it can easily be tailored to meet your specific needs and concerns; from financial needs to operating and cash flow needs.
Mezzanine investment combined with senior debt, reduces the amount of equity required in a business. Common equity is normally the most expensive form of equity and you cannot evade the tax attached anyway. However the mezzanine loans can create effective structures that lower the after tax cost of capital, is less dilutive than conventional loans and enhances the returns on equity.
Since the mezzanine loans require no assets, it means that the rates are generally high and mostly there are binding covenants created between you and the lenders.However, this should not blind you into trying them because in the long run they will make your developing business successful.
For more information and advice head over to Pluto Finance