In an interesting guide on the Perspektive Mittelstand portal Dr. Jürgen Kaack, managing director of the STZ-Consulting Group informs on important aspects of the so-called Mezzanine financing ⇒ Wikipedia).
This kind of financing, being in principle quite complicated, might be interesting to those German SME suffering from too small an equity ratio. As a consequence, the rating of such companies may in future be unnecessarily lowered. This in turn would lead to external funds being more difficult to raise and being more expensive. Given that raising equity capital is not easy either, Mezzanine financing may be the best solution (also see “Alternative financing promotes growth”).
“The hybrid financing methods between equity and external funds which are also called Mezzanine financing have a complex structure, and in practice it is important to choose carefully in order to reach the objectives aimed at. Mezzanine financing is a way of increasing capital during the expansion stage of a company” says Jürgen Kaack in his guide. But he also cautions: “It is to be ensured that the Mezzanine capital really has the character of a substitution for equity capital and is not merely external funds on the balance sheet. Otherwise it is true that the desired capital feed will be obtained, but not the additional positive effect on the rating by banks.”