Sometimes the situation gets a little too tricky for borrowers that they are left with a few options. One of the options is the mezzanine loan, which is a solution for commercial property owners who cannot obtain loan using real estate property as collateral. Mezzanine loans are not secured by real estate property because it’s already used as collateral for the previous loan. The borrower in this case uses his commercial stock to secure the loan.
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The borrower can be a business or a company owner. If he defaults the loan by failing to pay it off, the lender will seize the stock. This means that the lender becomes the owner of the stock. This sort of loan arrangement is easier than standard loans against real estate property. The lender can sell the stocks to get funds to pay off the debt.
A mezzanine loan isn’t the sole option for those who already obtained a first loan. Some people simply opt for a second mortgage loan, which is possible if the provisions of the first loan allow subsequent loans against the same property. But this is not often the case. So, borrowers are left with no choice but to obtain other types of loan.
Some borrowers who have immediate financial needs but are certain to be able to pay the debt within a short period of time can opt for short-term loans or bridge loans. Mezzanine debts actually share same qualities as bridge loans. In fact, the former is usually treated as a short-term loan. Lenders usually expect borrowers to pay off the loan within a short time. These types of loans can be difficult for borrowers but are the sole option for people who can no longer obtain money by any other means.
A mezzanine loan is unlike a short-term loan in the sense that it is often used to finance huge projects. Businessmen use it to fund construction of office complexes, shops, or industrial plants. This type of loan can amount to millions of dollars. In a few cases, a mezzanine loan can be long term.
There are different types of mezzanine lenders, each catering to a specific group of borrowers. Hence, borrowers should search for appropriate lenders.
Mezzanine lenders are at an advantage because they can quickly gain full control of the stock if the borrower does not satisfy loan repayments. This means that they can sell the stock to recover funds to repay the loan. This can be very risky for business owners, as they can lose their venture right away.
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