Mezzanine financing

In addition to the classic financing types of debt and equity, there is also mezzanine financing, also called intermediate financing. It is to be classified between the two classic types of financing. The most important types of mezzanine financing are participatory loans and convertible loans. This type of financing is particularly interesting for startups.

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Characterization of Mezzanine Financing

‍Mezzanine financings are situated between debt and equity and have characteristics of both classic types of financing. While they are subordinated to regular debt, they are senior to equity. Together with debt, they have that interest expenses for the corporation can be deducted for tax purposes. In addition, the capital provider has no direct right of co-determination. Economically, they tend to have more of an equity character. They are long-term in nature, usually not earmarked for a specific purpose, and typically the capital provider benefits from the appreciation in value of the company. According to recommendations from the federal government, mezzanine financing is worthwhile from an amount of two million francs (SME Portal of the federal government). Especially for startups, this financing option can be attractive, as it matches the slightly higher risk of the investment and is interesting for investors due to a participation in the appreciation in value of the company.

‍Participatory Loan

‍One of the most common forms of mezzanine financing is the participatory loan. This involves a long-term loan whose repayment is divided into a fixed base interest and a success-dependent component. For example, a certain percentage of sales or profit is conceivable. The ratio between base interest and success-dependent component can vary and be freely agreed upon. This version is lucrative for financings with increased risk. Due to the debt-character, there is also no change in ownership and co-determination rights. However, it is more expensive than regular debt.

‍Convertible Loan

‍Another widely used form is the convertible loan. This involves a longer-term loan being paid. The success-dependent component of repayment here lies in the possibility that the capital provider, under certain previously defined conditions, has the right to convert the loan into equity. If this option is not exercised, the loan including the base interest is to be repaid at the end of the term. An advantage of this variant is that, depending on the design of the loan, no capital needs to be paid out from the company in the case of exercising the conversion right. However, exercising this leads to a change in ownership and co-determination rights.

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