Investors planning to invest in Envestio projects very often ask me questions, such as “How is it possible to provide such high profits interest?” and “Why the company needs such expensive investments?”. I understand why such questions arise, I initially too had the same questions, until I started studying and getting closer acquainted with the backstage of the financial world. In this article I will explain, why efficient operation of the company requires a short-term loan and how safe it is for investors.
Due to prudent credit policy of the banks, it can be very difficult to receive new loans in credit institutions for further business development not only for new, but also for already well-known and fast-growing companies. Therefore, the question arises what to do in the situation, where bank is not ready to grant the whole necessary financing to further business development, you have no sufficient funds for implementation of the project and don’t want to give your company’s capital shares or stock to a private investor in exchange for an investment. One of potential solutions could be bridge and mezzanine financing that is considered the golden mean between bank loans and private investments.
What is Bridge financing?
Bridge credits are short-term loans that are usually issued up to one year and can satisfy borrower’s existing needs and allows solving his short-term financial difficulties until the moment of receipt of long-term financing. Repayment thereof is usually planned from other long-term credit assets that are granted on more beneficial conditions. Therefore, the main peculiarity of this type of credits is that they are directly related to the next phase of development of the implemented project – attraction of the long-term financing.
Respectively, Bridge financing is like a financial bridge between the company’s two solutions – today’s and tomorrow’s, this financing gives an opportunity to get involved in a new beneficial transaction, while the previous one is still in process. Therefore, borrower not only reduces his business risks, but also earns faster and more.
- cover urgent payments;
- finance purchases for beneficial prices;
- finance expenses related to re-planning of leased premises that allow further attracting many more solvent tenants and increasing lease revenue;
- develop building projects for the purpose of obtaining further financing for performance of building and renovation works at the immovable property site;
- prepare documents and tender solutions for the purpose of obtaining the European investments for business development;
- purchase a new immovable property object – before the moment of sale of the existing one.
What is Mezzanine financing?
Mezzanine financing by essence is loan of the type similar to bridge financing. The very name mezzanine has come from Italian word mezzano that literally means medium, and mezzanine loan is intended as a medium way between the bank and the company, since most often the mezzanine loan is a way, how the company can receive more assets for fuller project development or performance of any other type of economic activities additionally to the pledged bank loan.
Mezzanine loans are mainly intended for proven companies for provision of medium-term and long-term investments.
Possible uses of financing are:
- purchase of equipment;
- financing of current assets necessary for growth;
- management buyout transactions;
- purchase of other companies and re-financing of obligations.
At the same time, mezzanine is not suitable for new enterprises of companies with a very unstable cash flow, since one of the most significant criteria for evaluating the mezzanine credit is cash flow quality (stability/predictability and number of cash income sources).
Immovable property, vehicles or liquid assets are not required as a provision. Existing and future cash flow, as well as business prospective of the project are evaluated. As a provision for the mezzanine loan can also serve the company’s intangible values (e. g., trademarks, patents) and non-liquid assets (e. g., inventory).
What is the difference between both these types of financing?
At Envestio platform, each investment project has a description of the type of financing the company needs. The table lower shows the difference between both types of financing and how safe it is to invest in projects, where one of these financing types is specified as a purpose.
Currently, attraction of short-term financing has become popular in all Baltic States, mainly thanks to commercial banks’ strict crediting conditions and time-consuming evaluation process that still urges developers to search for alternative financing possibilities. Thanks to Envestio crowd-funding platform, entrepreneurs can receive loans, in order to achieve their ambitious goals in a shorter period, in turn investors receive significant profits interest.
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