A mezzanine loan is essentially a type of bridge loan, which is also used to provide short-term financing for small business owners and entrepreneurs. The key difference between mezzanine loan and a bridge loan, however, is that mezzanine loans are not backed by property as collateral.
With a Mezzanine loan the lender has the ability to convert to ownership (equity) of the borrower’s company in the event of non-payment or default. In other words, you’ll have to place part of your company’s equity up as a collateral when obtaining a mezzanine loan. Assuming you pay the loan back as described in the contract, you won’t actually forfeit any of your company. But if you don’t pay back the loan, the lender of the mezzanine loan will obtain part of your company’s equity.
Mezzanine loans typically carry a 12% to 20% interest rate, which is relatively high when compared to other financing options. However, the interest paid on mezzanine loans is tax-deductible. Furthermore, many financial experts believe that mezzanine loans are easier to manage than other funding options, as borrowers can calculate their interest into the balance of the loan.