Mezzanine financing is a type of funding that lies in the capital structure of a business, between senior debt (like bank loans) and stock. Business owners often use it to pay for growth chances like acquisitions, development, or other growth opportunities when they need more senior loans or want to maintain their stock.
How it works:
First-Level Debt:
Most of the time, mezzanine financing is a type of junior debt. This means it is lower on the capital structure than senior loans but higher than stock. In the event of failure, mezzanine lenders are paid back after senior debt holders but before company stock owners.
More risk, more reward:
Because mezzanine funding is riskier than senior debt, it generally comes with higher interest rates or other ways to get money back, like options or shares of stock. Lenders compensate for the higher risk with the higher gain.
Terms that are flexible:
Regarding form and payment terms, mezzanine financing can be more open than senior loans. It could include plans for putting off payments, higher interest rates, or stock kickers (company shares).
Examples of Use:
It’s often used in growth capital, leveraged buyouts, or to compensate for a lack of cash in mergers and acquisitions.
Features of equity:
Options for stock conversion or rights are sometimes part of mezzanine financing. These let lenders turn some loans into business shares under certain circumstances.
More generally, mezzanine financing helps businesses get extra money while balancing the costs of debt and the loss of ownership.