What is the difference between a bank loan and mezzanine financing?
Banks offer secured loans that require an underlying asset to serve as collateral for the loan. The amount of the bank loan is based on lending margins such as a percentage of receivables, inventory and real estate. In general, banks prefer to limit debt to the equivalent of three times cash flow. Unlike a bank loan, mezzanine financing typically is not based on lending margins of a company’s assets. Mezzanine financing is utilized when a company has good cash flow but does not have sufficient collateral for a bank. This type of lending is also known as “blue sky loans” because there is no collateral supporting the loan. However, mezzanine loans are sometimes collateralized by taking a second lien that may be secured by intangible assets such as patents. Therefore, mezzanine financing is based primarily on the ability to service the debt but not on asset value of the company. Most mezzanine financings are subordinated to bank loans, hence referred to as the “sub-debt,” another name for
