To meet their financial needs, small business operators and real estate individuals, often look out for financing or loan options. Two of the most common types of financing that many businesses consider are Mezzanine financing and Bridge loans. Both of these loans are available easily and essentially for short terms.
When it comes to the benefits that these two options have to offer, there are a few arguments that draw a fine line in between. Let’s dive right into the matter and explore how these two financing options are different and which one is better.
Mezzanine financing options are a hybrid between debt and equity. Just like mezzanine means a middle floor between the ground and the ceiling, that does not cover the whole floor, these financing modules falls in between the loans and equity selling.
Mezzanine loans, unlike other secured loans, are not backed by any collateral or property. Instead, in the case of a mezzanine loan, the lender can gain equity or convert to ownership of the borrower’s property in the event of failure of repayment of the loan. In other words, if you are considering of obtaining mezzanine finance, you should be ready to offer equity of your property or your real estate project as collateral.
Furthermore, the interest paid for a mezzanine loan is exempted from tax.
Bridge loans essentially fill the gap between a payment to be made and payment to be received. In easier terms, it is the most convenient form of loan sought in real estate transactions when a realtor wishes to acquire a new property but lacks the capital. The capital is acquired by selling a property and meanwhile the cash flow is maintained with the help of a bridge loan. These are also short term loans, but the interest is taxable as per the law.
Bridge loans are typically backed by collateral, such as the property itself or an inventory. Usually, the bridge loans are sought for not more than three weeks but some may seek a bridge loan for up to two to three years.
Who Does Mezzanine Loan Suit the Best?
While mezzanine loan and bridge loan serve the same purpose, a mezzanine loan has different terms. A mezzanine loan fills the financial gap for small and medium real estate developers, and the tenure for repayment of the same may extend way beyond a typical bridge loan tenure.
There are various sectors and business modules for which Mezzanine loans may be the best fit. These include property development projects, real estate sectors, buyouts, and refinancing. While a bridge loan may just bridge the financial gap, a mezzanine loan suits exceptionally well. You can easily find out if mezzanine finance is suitable for your business or not. It gives the borrower more control over specific lending circumstances such as internal rate of return, flexible negotiations of terms of loans, and profit dividends.
In most of the cases, the lender and the borrower may work together in coalition or advisory, since most of the repayment of the loan is carried out from the profits. In fact, even in the event of failure of loan repayment, the borrower may still retain most of the control over the project or the company, depending upon the terms of the loan.
Who Does Bridge Loan Serve the Best?
Small and medium-sized realtors can benefit from bridge loans. They can easily maintain flowing cash, often referred to as liquid cash, without putting up much at risk. But the short tenure of this type of loan makes it a little difficult for realtors to keep up with the flowing needs of cash. Thus, it makes less of a suitable choice for business holders.
Whereas, for individuals who wish to shift from their current residence to a new place, but fall short on payments, can seek a bridge loan. The ample time limit for the repayment of the loan, and the collateral management by keeping the old house as security against the loan amount puts the borrower at liability to pay the interest over the amount borrowed. This amount is more or less similar to the sale made. This, indeed, is a great option as very little is at risk and the borrowers can easily repay the loan amount as well.
Whether you go for a mezzanine financing or you obtain a bridge loan, you need to make sure that you fix up a permanent source of finance. This is to ensure that you don’t lose on the benefits of either of the schemes and make the most out of them.
In the end, it is up to you to decide which type of financing scheme suits you the best to fulfil your needs.