)Stock Advisor launched in February of 2002. This type of lending structure has pros and cons for lenders as well. Thus, at a standard corporate tax rate of 35%, a pretax interest rate of 20% is really only 13% after taxes are taken into consideration.In addition, mezzanine debt often has unique features that make servicing the debt more manageable. See how these loans work, along with the pros and cons for both borrowers and lenders. The mezzanine loan is the exception. But creative financing approaches like mezzanine loans might be able to fill the gap. For example, you might use a mezzanine loan to acquire an existing business or expand operations for a business that’s already profitable. Mezzanine financing is more manageable than other debt structures because borrowers may figure their interest into the balance of the loan. I think stock investors can benefit by analyzing a company with a credit investors' mentality -- rule out the downside and the upside takes care of itself. An equity investor is not guaranteed any dividends and equity investors are not entitled to receive a specific amount of money on a regular basis.First, you have to consider that the interest on debt is a tax-deductible expense. We'll assume that the profits are taxed at 35%, so the after-tax profit is $98,800.Thus, your return on your $400,000 equity investment is $98,800 annually, or 24.7% per year -- not bad!Example A: Financing the pizzeria with senior debt and equityBut what if you could reduce your equity investment? Terms could include the borrower, purchaser, expiration, purchase price, amortization and financing rates. It is the highest-risk form of debt, but it offers some of the highest returns -- a typical rate is in the range of 12% to 20% per year.A mezzanine lender is generally brought into a buyout to displace some of the capital that would usually be invested by an equity investor.Mezzanine debt takes up some of the financing that an equity investor would otherwise chip in.Suppose a private equity firm wants to buy a $100 million company. However, your required investment was halved -- you only need to invest $200,000 of your own capital instead of $400,000.As a result, your total annual profits fall, but your return on equity rises from 24.7% per year to 39.7% per year.Example B: Financing the pizzeria with senior debt, mezzanine debt, and equityMezzanine debt also generates a return that is more consistent with equity than debt. Like every kind of borrowing, mezzanine loans come with benefits and drawbacks for borrowers. Traditional mezzanine lenders are book-and-hold investors, generally focused on cash-flow lending, looking for a minimum term (call protection) and equity participation to generate longer term results. Mezzanine lenders will occasionally include features like so-called PIK toggles, which allow the borrower to "pay" its interest by rolling it into the loan balance. To use a real-world example, mezzanine debt investor Finally, mezzanine investors take significant risks just like equity investors, but they also get the benefit of having contractually mandated interest payments each month, quarter, or year.
Retirement Mezzanine lenders usually work with companies that have a successful track record. Mezzanine loans typically have relatively high-interest rates and flexible repayment terms. Mezzanine Financing .

Personal Finance Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.Mezzanine debt gets its name because it blurs the lines between what constitutes debt and equity.

A mezzanine loan is a form of financing that blends debt and equity. The mezzanine funds establish a financial relationship with a company on behalf of their limited partners. Mezzanine Funding Rates & Term Sheets. (TMFValueMagnet) A Non-QM Mortgage Might Be for YouCheck Out Peer-To-Peer Loans If You Are Looking for an Auto LoanWhat the Term Subprime Means Is Loans for Less-Than-Perfect CreditWhat's the Difference Between Home Equity Loans and Lines of Credit?Ready to Refinance? Working Freelance?

If there’s not enough money to pay everybody, those creditors get in line. When a business needs funds for a significant project or acquisition, traditional lenders may be unwilling to provide all of the money required.
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