Is Mezzanine Financing in New Zealand Right for Your Project?
There used to be just two forms of lending to enable new projects and strategies get off the ground – banks loans and equity funding – but all that has changed over recent years with a growing number of mezzanine financing in New Zealand.
Mezzanine financing will cost you more than a conventional type of bank loan but could still be the perfect answer for businesses which foresee rapid growth or those involved in some sort of leveraged buy-out situation.
Essentially mezzanine finance is a hybrid between traditional type bank loans and equity funding. The provider in a mezzanine finance agreement will hand over the money (just like in a bank loan situation) but the repayments will not be made in interest only, some element of the equity of your project will also be included in the deal. The lender will therefore have their initial investment paid back (with interest of course) as well as benefit from shares in the profits when the business has achieved its projected growth.
Mezzanine financing video
Mezzanine finance is only available for larger projects; these investors are interested in handing over large chunks of cash in return for hefty profits. This means that many SMEs with lower investment needs may not be in a position to take advantage of the hybrid form of lending known as mezzanine finance.
Banks do not like to lend on high risk projects – there is an old saying that banks only like to lend money to the people or businesses which don’t really need it – they like to feel that they are in a “win-win” situation. Alternatively choosing to use equity funding can prove to be expensive in terms of handing over large chunks and even control of your business.
Mezzanine loans do fall somewhere in the middle. The loan will generally be granted in a similar way to a traditional bank loan but the lender will of course need to be confident of high returns in such a potentially high risk situation. This does not mean that the business owner or shareholder must hand over valuable shares but the investor will look forward to making handsome profits on the amount they have invested within the company or project.
Unlike a traditional bank loan with monthly repayment schedules which can affect the cash flow of a growing business, mezzanine loans will be typically repaid in a lump sum towards the end of the agreed term. Mezzanine loans are naturally more expensive than most traditional bank loans but that really is only to be expected when you consider the added risks involved and the other benefits.
One of the most common occasions when this type of finance is used is during leveraged buy-outs as it provides flexibility while retaining the maximum share holding for the current owners. It may also be employed during the early stages of a business which has a high, rapid rate of growth potential. The mezzanine loan can become part of a larger investment program along with conventional term bank loans and other forms of equity finance.
This type of financing arrangement can be the perfect solution for a newly established business as a method of bridging the gap between the amount of financing available from conventional bank loan arrangements against the assets of the company and the perceived value of the new business project. It can be used as a means of financing acquisitions, corporate expansions projects, management buy-outs, leveraged buy-outs, recapitalizations and more.
Some real estate developers will also rely on mezzanine finance to secure the finances they need for project development – it can be a handy source of income when the primary mortgage lender or the construction loan is in excess of 10%. Collateral may be required in these circumstances which allows the financier to take control of some of the assets in the event that the borrower defaults on the loan agreement or that a foreclosure takes place. These can be executed more rapidly than the standard foreclosure timeframe for the traditional mortgage which can take as much as 12 months. Stocks which are the personal assets of the borrower may be seized legally in just a few months.
The mezzanine finance format has been used very successfully for a large number of businesses and corporations over the years.
While the idea of mezzanine financing sounds a potentially costly it is in fact a handy and speedy form of finance. If you would like some more information about mezzanine financing in New Zealand, talk to the Global Pacific Finance.
They are commercial financiers in Auckland but provide funding to businesses all over NZ.
Their website has more details about the types of commercial finance they offer including mezzanine financing.