Mezzanine financing is a hybrid of debt and equity that sits between senior debt and ownership in the capital stack. It is subordinated to senior loans, carries a higher rate to compensate for that risk, and often includes warrants or conversion rights that give the lender an equity upside.
Mezzanine capital fills the gap between what a senior lender will advance and the equity an owner can put in — common in acquisitions, recapitalizations, and growth deals. Because it ranks behind senior debt for repayment (it is [[subordinated-debt]]), mezzanine lenders price for the added risk with higher coupons and frequently attach warrants or a conversion feature for equity-like returns. Mezzanine is typically structured against cash-flow capacity rather than hard collateral, so lenders underwrite metrics like [[ebitda]] and leverage multiples closely. The Federal Reserve's Small Business Credit Survey (https://www.fedsmallbusiness.org/survey/2024/report-on-employer-firms) documents how firms layer financing sources; mezzanine sits at the higher-cost, higher-flexibility end of that stack, above a senior term loan or [[bridge-loan]] but below true equity.
It is subordinated — repaid only after senior debt in a default — and therefore priced higher, often with warrants or conversion rights. Senior loans have first claim on collateral and lower rates.
Typically in acquisitions, buyouts, or growth deals where senior debt and available equity don't cover the full need, and the borrower wants to avoid giving up more ownership than necessary.