Finance term
Mezzanine Financing
Also known as: mezz debt, mezzanine debt
Definition
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.
Detailed explanation
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/reports/survey/2026/2026-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.
◈ Worked example
- A $5M acquisition funded with $3M senior debt, $1M mezzanine, and $1M owner equity
- Mezzanine lender takes a 13% coupon plus warrants for 5% of equity on a growth-stage deal
- When a senior lender caps leverage at 3x EBITDA, mezzanine bridges to 4.5x for the buyer
Common questions
The most-asked questions about Mezzanine Financing — answered straightforwardly.
How is mezzanine financing different from a senior loan? +
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.
When do businesses use mezzanine financing? +
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.
How is mezzanine financing different from a bridge loan? +
A bridge loan is short-term (typically 6-36 months), asset-secured, interest-only financing that closes a timing gap — like covering an acquisition before permanent financing is arranged — and exits via a defined refinance or sale. Mezzanine financing is longer-duration, subordinated to senior debt rather than secured by a first lien, priced against cash-flow capacity rather than collateral, and often carries warrants or conversion rights for equity-like upside. Businesses sometimes use a bridge loan to move fast and mezzanine capital to permanently fill the gap between senior debt and equity in the capital stack.
Is mezzanine financing considered debt or equity? +
Both — it is structured as debt (a loan with a coupon and repayment schedule) but behaves like equity in two ways: it ranks behind senior debt for repayment, and lenders typically attach warrants or conversion rights that let them participate in the company's upside. That hybrid structure is why it is priced higher than a senior term loan but usually cheaper than raising pure equity.
What happens to mezzanine debt if the borrower defaults? +
Because mezzanine debt is subordinated, the senior lender is repaid in full first from any collateral or liquidation proceeds before the mezzanine lender sees a recovery. Mezzanine lenders accept that lower repayment priority in exchange for a higher coupon and the equity-like upside from warrants or conversion rights — the added default risk is priced into the rate rather than offset by a superior collateral position.
Further reading
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