Mezzanine Finance For NZ Explained
Mezzanine finance is a method of business financing in New Zealand which combines some parts of debt financing as well as equity investment. This combination provides a temporary, relatively affordable option against the two most common alternative methods of business financing, namely private equity funding or bank debt.
In short there are two main categories of financing a business – there is “equity investment” and the other is “debt”. Mezzanine finance is a sort of combination of the two which can provide an affordable alternative method of financing projects which do have some element of financial risk involved.
“Debt finance” is pretty self-explanatory really. A bank or other financial institution puts forward an amount of money which must be repaid with interest. This is sometimes over an agreed period of time with a pre-determined amount of money to be repaid each month or quarter, alternatively it could be in the form of an overdraft agreement. The interest which the bank makes is how they make their money on the deal. The bank will know at the outset exactly how much money they will be repaid and what their profits will be.
Explanation of mezzanine finance
“Equity investors” however, make their profits as a direct result of the growth of the business or fruition of the project. They invest only in a business which they deem to have the potential to grow, often in return for some dividend appropriate to the number of shares they hold. The real return, however, is only realized once the business has grown and the shares can be sold for a relatively large profit.
These “equity investors” – aka “business angels” or “venture capitalists” are constantly on the look-out therefore for potentially risky strategies when they believe that the project will be a financial success. These equity investors see the substantial returns available as a risk worth taking against the business. Banks do not have this philosophy and are therefore much more cautious – they like to know that any lending will be repaid with interest within a given time-frame.
The problem which many business owners and entrepreneurs find with business angels and venture capitalists is that they like to take a chunk of their business as a share-holding. In these situations capital can cost anything up to around 30% of their business. This is a significant amount of your business to hand over to someone else plus it reduces your options later. For example, you may want to bring in a new partner or buy another business. If you have given away 305 of the control of your company, the decisions are more difficult to reach and you have less to play with n terms of striking a deal. So in the long term for the business owner may not be acceptable to them.
So what’s the alternative?
The basic idea of mezzanine finance is that investors provide money on a similar basis to the traditional bank loan type scenario yet enjoy additional benefits as and when the business starts to grow and profits increase. Mezzanine investors are generally more comfortable to invest in businesses and strategies with an amount of risk involved (unlike the banks) yet do not tie down large chunks of the business shares (like business angels).
The Advantages of Mezzanine Finance
It is a cheaper form of raising the capital needed to help a business to grow than using private equity – the costs involved usually peak around 20% – 25% rather than over 30% as the previously mentioned forms of finance.
This type of funding is generally less rigid than the traditional bank loan which does require regular repayments – whether they are monthly or quarterly which can be a substantial drain on the cash resources of the company. The majority of mezzanine loans are paid back annually with the bulk of the funds repaid towards the end of the agreed term when hopefully the business has grown substantially enough to furnish the payments. Unfortunately any company which has not managed to reach its projected potential may find these large pay-outs to be a substantial blow close to the end of the agreed term.
Mezzanine finance is really only utilised for much bigger action plans which need a substantial sum of investment. The majority of this type of loan is in the millions rather than the thousands or the hundreds. This can put this type of funding out of reach of many SMEs although as this type of financing grows some smaller loans may become available.
Any entrepreneur who is unable or unwilling to hand over large shares of their business to equity investors yet are unable to secure lending from a traditional bank or financial institution may find this type of mezzanine finance a very effective, affordable and convenient method of financing their business or strategy.
For Auckland businesses looking for capital inputs without giving away large portions of their company may like to consider Global Pacific Finance Ltd for mezzanine finance New Zealand companies can take advantage of.
They have a highly experienced team of financiers who have contacts with many different lenders. This means they can negotiate funding to suit your particular needs whether it is for a business acquisition, an expansion strategy or for investing in a property development. Their people have worked with clients and funding sources in many different industries so contact them to see how they can help you.