Mezzanine financing is a hybrid form of capital that blends debt and equity features. It is typically subordinated to senior debt but senior to common equity, and it may be secured on a junior basis in some cases.
Companies use mezzanine financing to raise capital for growth, acquisitions, or recapitalizations when senior debt alone does not meet funding needs. The funds come with interest, typically higher than senior loans, and a longer tenor. Because the instrument sits between debt and equity, lenders often negotiate equity-like features such as warrants or the option to convert part of the debt to equity, providing potential upside if the business performs well. Mezzanine lenders may also require protective covenants and may have the right to convert or participate in future financings.
Mezzanine loans are usually five to seven years in maturity, with limited amortization and flexible repayment schedules. They are more expensive than senior debt, reflecting higher risk and junior position in the capital stack. Depending on the deal, the instrument can be secured or unsecured, and it may be packaged with prepayment penalties or step-ups in interest if not refinanced. Because it ranks behind senior debt in a liquidation scenario, it carries greater risk for lenders but can help a company raise substantial capital without immediate equity dilution.
Mezzanine financing is frequently used in leveraged buyouts, growth financings, recapitalizations, or situations where a company has reliable cash flow but cannot obtain sufficient capital from senior lenders alone. It can bridge funding gaps while providing lenders potential equity-like returns.
In a private-equity deal, a company might use mezzanine financing to cover a portion of the purchase price, with the lender receiving a note plus warrants as compensation for higher risk.
Senior debt · Subordinated debt · Convertible debt · Equity financing · Warrants · Leveraged buyout · Capital structure