In addition to receiving interest payments often in excess of 12% on their initial contribution, investors may be able to recoup their investment and enjoy profits in multiple ways when they engage in a mezzanine arrangement.
For example, investors can opt to receive interest payments as a single "payment in kind" instead of collecting individual interest payments periodically. This makes it so the company in question does not need to pay back interest each year. Instead, the company must return the initial investment, plus all the interest payments over the agreement period, all as a lump sum.
Another option available to mezzanine investors is a participation payout. This grants investors a percentage of the company's net sales or profits. An arrangement fee must also be paid to investors when the lending transaction is closed, making this form of financing even more profitable when it proves to be successful.
Mezzanine financing is a hybrid of debt and equity financing, beginning as a debt that lenders can convert to equity in the borrowing company at a later date. In mezzanine financing, lenders often exercise the option to convert debt to equity when a loan is not repaid in a timely manner or in full.
