What are the typical costs and terms for mezzanine financing?

Understanding the financial commitment involved in mezzanine financing is crucial. Here’s a breakdown of what you can generally expect regarding interest rates and repayment periods:

Costs (Interest Rates):

  • Significantly Higher than Senior Debt: Expect mezzanine financing interest rates to be substantially higher than what you’d pay on a traditional bank loan (senior debt).

  • Double-Digit Range is Common: Rates typically fall within the double digits, often ranging anywhere from 12% to 20% per year, sometimes even higher depending on the perceived risk of the deal, market conditions, and the specifics of the transaction.

  • Compensation for Risk: This higher rate reflects the lender’s increased risk. They are in a subordinated position (paid after senior lenders in case of default) and often rely more on your company’s cash flow than hard collateral.

  • Total Cost: Remember that the total cost might also include fees (upfront, monitoring) and the potential value given up through equity components like warrants, not just the stated interest rate.

Terms (Repayment & Maturity):

  • Longer Terms: Mezzanine loans typically have longer repayment periods than shorter-term bridge loans. Maturities often range from 5 to 7 years, sometimes longer.

  • Alignment with Senior Debt: The maturity date is often structured to align with or extend beyond the maturity of the company’s senior debt facilities.

  • Interest Payments: You’ll usually make regular interest payments (e.g., monthly or quarterly). Sometimes, there might be an option for PIK (Payment-In-Kind) interest, where some or all of the interest accrues and is added to the principal balance instead of being paid in cash, though this increases the total amount owed.

  • Principal Repayment: The principal is often repaid as a lump sum (“bullet payment”) at the maturity date, rather than being amortized (paid down gradually) over the life of the loan. Repayment might also be triggered by specific events like a refinancing, sale of the company, or an IPO.

In essence, you’re paying a premium interest rate for mezzanine financing in exchange for securing less dilutive capital over a longer term, often designed to support a significant growth phase or transaction before a potential refinancing or exit event.

Navigating these costs and terms effectively is crucial. Contact the experienced consultants at Canada Business Loan Experts today for personalized advice and assistance in structuring and securing the right mezzanine financing solution for your business.