Is Mezzanine Financing The Key To Financial Success?

Mezzanine financing is becoming increasingly important as alternative lenders struggle to secure enough capital due to the risk-averse nature of senior lenders.

Fremont, CA: The global economy faces challenges like inflation and rising interest rates, but the demand for mezzanine and growth funding in fintech lending is increasing. Mezzanine finance is crucial for supporting SMEs who struggle to access traditional bank loans or private equity funding.

Demystifying mezzanine finance

Mezzanine financing is a hybrid financing instrument that sits below senior debt and above equity capital in a company's capital structure. It provides flexible capital that combines debt and equity characteristics. Mezzanine financing is becoming increasingly important as alternative lenders struggle to secure enough capital due to the risk-averse nature of senior lenders. By securing additional funding from a third-party investor, mezzanine financing creates a buffer between the senior debt provider and potential losses. For example, a business lender could secure £15 million of capital by working with a mezzanine finance provider.

Weighing the risks

Mezzanine finance is a higher cost than senior debt due to its lower repayment hierarchy and lower risk of losses. With its capital buffer and mezzanine investment, senior debt can provide more capital at a lower cost. This buffer is especially important during economic uncertainty, with higher default rates. As a result, there is a growing demand for mezzanine finance to build a robust funding stack.

Channeling growth

Mezzanine finance is crucial for fintechs to enable lending activities, especially for small and medium-sized enterprises (SMEs). SMEs face challenges due to rising living costs, including rent, bills, and commodity costs. High-street banks are reluctant to lend to SMEs due to their high-risk perception and slow adoption of technology-based digital lending. Innovative fintech can fill the funding gap for SMEs. As inflation, interest rates, and corporate default rates continue, there will likely be strong demand for mezzanine financing from alternative lenders, increasing the lending industry's flexibility and agility.