Question

As an executive, you are faced with a cash shortfall that you think is temporary but that may exceed 12 months. Your bank lines of credit are maxed out. You don’t really like to commit to a mezzanine loan. What are your other options and how do they compare to a mezzanine loan?

Answer 1

Mezzanine Loan

Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally, after venture capital companies and other senior lender are paid.

Mezzanine financing may result in lenders gaining equity in a business or warrants for purchasing equity at a later date, thus when securing mezzanine finance owners sacrifice control and upside potential due to the loss of equity and that's quite a huge price to pay for quick business loan.

Other Options of Financing cash shortfall may include:

• Factoring : It is a financial transaction in which a business sells its Accounts receivables to a third party (called a Factor) at a discount. This helps in quick cashflows although this method is a bit expensive as it involves Factoring commission, interest on the advances made by the Factor, but this method can be used in the given circumstance as it will fulfill the current need with transferring the ownership of the company in the hands of Money lenders.
• Accounts Payable: Using accounts payable you can delay paying suppliers, but this may involve paying them higher amounts. It can reduce the burden of cash by making a negotiable instrument which can be used instead of real cash.
• Early payments discounts : Company can offer early payment discounts to the company's debtors in order to attract them to payoff their dues early thus meeting the requirement of cash shortfall.
• Crowdfunding : It is most public form of alternative financing. It is simply an online platform where many investors invest small amount in a company. This saves the company from going to bank in search of financing. The investors get perks such as rewards, early access, etc.
• Short term Borrowing from public : If the company enjoys good reputation it can raise short term loans from public as well and repay it along with the interest.
• Advance from Customers : In case of Cash shortfall, a company may ask its creditors to grant Advances , this will help in making quick cash available. It does not involve any interest, although customers making advances are allowed discounts on their advances.
• Debentures : A company can issue debentures , it can be issued for term of period as required however company requiring short term cash may not issue debentures, but as mentioned in the question that need may be for more than 12 months, Debentures can be an alternative.

Thus , the above Financing alternatives are different from a Mezzanine Loan financing as all of the above are short term period and does not involve fear of transfer of ownership.