Currently, traditional financing institutions still apply conservative risk indicators to businesses and as a result, many companies in Lithuania cannot obtain the bank financing needed for development. Financial institutions require a significant contribution from the companies themselves to the financing of each investment project, which limits the pace of development, as the resources of each company are limited or working capital is significantly reduced. However, there is better way and companies can now take advantage of a great opportunity to help businesses grow faster - mezzanine loans.
Every business strives to grow and strengthen its competitive advantage, earn more and do that faster. Unfortunately, these plans are not always supported by the banks or credit unions, which often prevent companies from growing at the desired pace. The crowdfunding platform “Nordstreet” solves this problem by offering mezzanine loans to businesses. How do mezzanine loans benefit businesses, banks and investors?
These types of loans help businesses grow faster than their working capital would enable, allowing companies not to lose their rainy day fund. The good news is also that Nordstreet, which provides this service, has extremely transparent payment rules and structure, and one of the most important advantages for businesses is that the platform does not take over the management of the company. If the pledged assets are shares of the company, Nordstreet's purpose is not to control the company's activities, so they do not have to worry about the shares being sold.
This service does not interfere with bank requirements, as the transaction allows these institutions to finance projects in the desired ratios. The service is also attractive to investors, as Nordstreet mezzanine loans are only provided to established and developing companies that meet the banking risk assessment criteria, which means that the risk is significantly reduced when investing. As these companies are carefully screened and receive a financing offer, investors would contribute to the growth of better-known, higher-rated and reputable companies.
Another unique side of mezzanine loans is that the loan can be repaid at the end of the term, which allows businesses to grow now, run more projects and strengthen their competitive advantage, increase sales or keep working capital at an desirable level.
Often, business development opportunities are limited by a company’s equity reserves because, as standard, each investment requires company’s contribution to meet the financial institution’s risk requirements. The financing condition is set in traditional financing institutions - the company must contribute as much as 20%, 30%, or sometimes as much as 40%, of its own funds. And if the plans are ambitious, only in rare cases do the company’s shareholders or the company itself have sufficient resources to meet these requirements.
Increasing the intensity of financing can also increase the return on equity. For sustainable and promising business investment ideas, Nordstreet offers to increase the intensity of financing through mezzanine loans.
"With this offer, we hope to give our investors the opportunity to invest in already known and well-established businesses that do not lack ambition to expand. Our service enables companies to grow faster and use a smaller part of their working capital” - Jonas Izokaitis, Nordstreet's risk manager.
If the bank finances 70 percent of the project, the mezzanine service can provide another 10 or more percent to investment. This allows the company's working capital to be maintained in case of any unexpected events or to significantly increase the amount of investment while maintaining a higher funding intensity.
Here's an example: if you would like to purchase 5 vehicles that cost 500,000 EUR (that cost 100,000 EUR each). The down payment of 20% would add up to 100,000 EUR. With mezzanine loan you could reduce this amount to 50,000 EUR and free up 50,000 EUR for working capital. Or instead, you could invest the remaining 50,000 EUR and purchase another 5 vehicles! This would allow you to double your growth while utilising the same amount of your working capital.
In another case where existing loans are secured by assets, but the financial institution is not willing to finance more due to risk management standards or temporarily impaired financial indicators, Nordstreet may offer financing with second rank real estate pledge, shareholder real estate mortgages or even without real estate pledge.
Therefore, mezzanine loans allow businesses to get bigger loans and grow faster. By providing this service, Nordstreet contributes not only to the promotion of entrepreneurship in Lithuania, but also to the growth of customers in the banking sector.