How Asset Management Works in the Philippines — January 28 2025
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For businesses in the Philippines, securing capital for growth, acquisitions, or expansion can often be a complex challenge. Traditional funding methods like bank loans or equity financing may not always align with the goals of companies seeking to retain control over their operations while accessing critical funds. This is where mezzanine debt financing in the Philippines becomes a valuable solution.
This article will provide an in-depth look at mezzanine debt financing, explaining how it works and highlighting the benefits it offers to businesses in the Philippines.
From providing flexible repayment options to preserving equity ownership, let’s look at how it can offer your business an alternative pathway to raise capital without the need for giving up control.
Mezzanine debt financing is a form of capital that sits between traditional debt and equity financing, offering businesses an alternative option to fund growth, acquisitions, or expansion.
It typically comes in the form of a loan that is secured by the company’s assets but also includes equity-like features, such as warrants or convertible options, allowing lenders to convert the debt into equity under certain conditions.
Here’s what their key characteristics look like, setting them apart from traditional debt or equity financing:
Like a loan, it provides capital that the business repays with interest. However, unlike standard loans, mezzanine financing often includes an equity component. This can take the form of warrants or convertible options, allowing lenders to convert their debt into company shares if specific conditions are met.
This unique structure not only allows businesses to secure the funds they need but also provides lenders with the potential to benefit from the company’s future growth and profitability, making it a mutually advantageous arrangement.
When it comes to repayment priority, mezzanine debt occupies a middle ground. It is ranked below senior debt but above equity in the capital structure. This means that in the event of financial difficulties or liquidation, mezzanine lenders are repaid only after senior debt holders, such as banks, have been fully compensated.
However, they take precedence over equity investors. While this subordinated ranking increases the risk for lenders, the higher returns and equity-linked benefits make mezzanine financing an attractive option for them.
Because mezzanine debt involves higher risk for lenders compared to senior debt, it generally comes with higher interest rates, typically ranging from 12% to 20%. These rates are reflective of the added risk and the subordinated position of the debt.
Additionally, the repayment terms are often structured over a medium-to-long-term period, usually spanning 5 to 7 years. This extended timeline provides businesses with more breathing room to manage their cash flow and allocate resources toward growth initiatives, while still meeting their financial obligations.
For businesses looking to grow or expand, securing the right kind of financing can be challenging. Mezzanine debt financing provides a unique solution by combining the benefits of both debt and equity, allowing companies to access the funds they need without giving up too much control.
Here’s what makes it appealing for businesses in the Philippines:
Unlike traditional loans, mezzanine debt offers flexibility when it comes to repayment. This can be especially beneficial for businesses in the growth stage, as it often comes with deferred or interest-only payments during the early years. This flexibility helps businesses manage their cash flow and focus on growth without the pressure of regular principal payments.
Many business owners are reluctant to dilute their ownership by offering equity in exchange for capital. Mezzanine debt allows companies to raise funds without giving up significant ownership, as the financing is structured as a loan with the option for lenders to convert it into equity under certain conditions.
Compared to venture capital or equity financing, mezzanine debt typically involves a lower risk for the borrowing business. Because it is subordinated to senior debt but ranks higher than equity in a liquidation scenario, it strikes a balance between risk and return.
This gives businesses a way to secure capital without taking on the level of risk that comes with venture funding, making it an attractive option for companies looking for a more stable financing solution.
Mezzanine debt financing in the Philippines offers a powerful and flexible solution for businesses seeking capital to drive growth, acquisitions, or expansion without compromising control or taking on excessive risk.
At Rocket Equities, we specialize in providing expert advice and strategic guidance for businesses looking to explore mezzanine debt financing. If you're ready to take the next step and secure the capital needed for your business's expansion, contact us today to learn more about how we can help you achieve your financial objectives.
