In addition to traditional bank credit, alternative financing can be beneficial for SMEs.
When more substantial financing is required (over CHF 2 million for a management buyout, expansion or restructuring, for example), a type of financing called mezzanine financing may be used.
This type of financing combines foreign funds and equity/venture capital funds. From a legal perspective, mezzanine financing is considered as a foreign fund. Interest is therefore tax deductible. With respect to foreign lenders, mezzanine capital is ranked subordinately; however, with respect to equity, it is senior.
Mezzanine is an expression used in American architecture to describe a raised ground floor. It is a useful term as, through the mezzanine system, banks grant more credit than usual and can offset the higher risk by taking a stake in the company's profits.
The conditions for these loans offered by banks, investment companies and individuals are extremely varied. Lenders generally receive, in addition to interest, a stake in any increase in value of the company (called an “equity kicker”) in the form of a stock option (similar to a warrant) for example. A combination of the following basic types is possible:
- Loans with a fixed base interest rate and a performance-based component, such as an interest in cash flow or revenue (related-party loan).
- Loans which, under certain prior conditions, can be converted into an interest in the company (convertible loans and options loans).
For lenders, the higher risk is justified by the targeted higher return (between 12% and 20% per year). In Switzerland, mezzanine loans are offered by UBS, Credit Suisse and Zürcher Kantonalbank, among others. Internationally and in Europe, especially in the United Kingdom and Germany, some companies and funds specialize in this type of financing.