ideal solution.

In a mezzanine financing arrangement, the borrower negotiates an arrangement with a lender wherein the necessary capital is secured by combining a loan with a stock purchase to the lender. "As a rule, you pay only interest on the money you borrow (at prime plus two to four points) for five years or so. At that point, you [the business owner] cash out your investors by going public or by recapitalizing your business in a new round of financing. Your investors, meanwhile, have earned interest on their loans, and if the value of your business has increased, they realize capital gains by selling their stock in your company."

Lenders that review mezzanine financing requests closely examine several facets of the prospective borrower's business when weighing the deal. The most important consideration examined by a mezzanine lender is the company's capacity to generate cash flow. Because the primary concern of a subordinated lender is a company's ability to generate cash, if it is anticipated that the business' cash flow is sufficient to repay the loan, it is quite likely subordinated debt can be used.

" In addition to cash flow, lenders also examine ownership flexibility, company history, growth strategy, and acquisition targets (when applicable). Business owners in need of capital, meanwhile, should do some comparison shopping of their own. "In selecting a source for mezzanine financing, companies should pay attention to personnel turnover, commitment to the business, track record, and flexibility in structuring," . "Low turnover and commitment to the business are key because businesses rarely perform exactly according to plan. Therefore, you need an investor who understands the business and will respond consistently and appropriately."

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Financing offers a way for publicly and privately held companies to attain financing without going public and potentially ceding ownership of their company. It is a blend of traditional debt financing and equity financing, reaping some benefits of both. Like equity financing, mezzanine financing is an unsecured debt, requiring no collateral to be put up unlike traditional bank loans. Like debt financing, mezzanine financing is very fluid and does not necessarily involve giving up an interest in the company.

Mezzanine financing relies on very high interest rates in the 20-30% range to make it profitable. Unlike a bank loan, mezzanine financing does not hold real assets of a company as collateral; instead, lenders offering mezzanine financing have the right to convert their stake to an equity or ownership in the event of a default on the loan.

Mezzanine financing is a particularly appealing form of liquidity for owners of privately held companies. It is traditionally understood that a privately held company simply cannot achieve the same sort of fluid capital flow as a publicly held company, but mezzanine financing offers a way to balance that situation without going public. In addition to the fact that mezzanine financers do not retain an interest in the company except in the event of a default, there is also the important consideration that they actively do not want an interest in the company. While traditional equity investors are often striving towards some level of control, a displeasing thought to many private owners, with mezzanine financing one can rest assured that the financers will do what they can to ensure you pay off your debt without resorting to default.

Because of the lack of real collateral, as well as the high speed of lending, mezzanine financing is typically more difficult to receive than a traditional bank loan or equity financing. A company must demonstrate an established track record in its industry, show a profit or at the very least post no loss, and have a strong business plan for future expansion. Because of these limitations, mezzanine financing is not for every business. For businesses looking for a quick injection of capital to grow their already successful business, without giving up an interest, mezzanine financing can be an ideal solution.

Mezzanine financing involves the use of financial instruments that fall between the risk-return parameters of equity (high risk, high return) and senior debt (low risk low return. ) Mezzanine financing includes subordinated debt, convertible subordinated debt, equity warrants, and preferred equity, described below:

Convertible debt. Convertible debt gives its owner the right to exchange debt by a certain time for a predetermined amount of equity at a fixed price. Until conversion, convertible debt carries the right to stipulated interest payments, repayment of principal on maturity, and a claim on cash flow and assets ahead of equity. Before conversion, the convertible debt holder receives interest payments that are almost always higher than dividends. If the project is successful and the actual worth of the equity is greater than the conversion price, the holder benefits from upside appreciation in the price of equity.

Equity warrants. Equity warrants are long-term options that give the holder the right to purchase common equity at an established price within a specified period of time. This enables the holder to benefit from the upside potential of a successful project. They are often given to subordinated debt holders to lower the interest rate paid.

Preferred equity. Preferred equity is a special class of equity with priority over common equity in receiving dividends. Mezzanine financing, local and foreign, can be a useful tool for attracting financing for projects.