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Mezzanine Finance: Bridging the Gap Between Debt and Equity
Mezzanine finance is a hybrid form of funding that sits between traditional debt and equity in a company’s capital structure. It is commonly used by growing businesses that require additional capital beyond what senior lenders are willing to provide but do not want to fully dilute ownership through equity financing. By combining features of both debt and equity, mezzanine finance offers flexibility to borrowers while providing higher returns to investors.
One of the defining characteristics of mezzanine finance is its subordinated position. In the event of liquidation, mezzanine lenders are repaid after senior debt holders but before equity shareholders. To compensate for this higher risk, mezzanine financing typically carries higher interest rates than senior loans and often includes equity-linked components such as warrants or conversion rights. These features allow lenders to participate in the upside potential of the business.