Mezzanine capital is often utilized in the following situations by an enterprise:
- The bank is at its comfort level and will not lend beyond a certain point.
- Public equity financing is not available due to the present IPO market and/or company’s track record, industry, or growth prospects.
- Equity financing is not available in the private marketplace because investors want a greater equity percentage than you are prepared to give up.
- The venture capital market doesn’t view the company as a rapid growth situation.
Small businesses may use mezzanine financing to overcome working capital constraints caused by fast growth; higher-than-acceptable leverage under traditional underwriting criteria; as a means to preserve capital and gain a longer repayment term; and to address credit issues that do not meet bank thresholds.
However, the entrepreneur believes that the company will experience rapid appreciation in the next few years. Therefore, instead of selling undervalued equity today and receiving a low price,the entrepreneur h can use mezzanine financing to bridge the company until it proves itself in the marketplace. At that point, you can sell stock for a higher price.