Mezzanine finance

Mezzanine financing is a hybrid of debt and equity financing that can be useful for large projects, buyouts or expansion. It is a fairly complex form of business loan that gives the lender the right to a share of equity in your business if you default on your loan. Mezzanine finance comes under the umbrella of private debt.

Mezzanine finance sits in the middle between debt and equity finance (‘mezzano’ is Latin for ‘middle’). You might use it as a third option alongside business loans and equity finance if you’re thinking about an acquisition, buyout or expansion. You can also see it as a form of top-up finance if you can’t borrow as much as you need but don’t want to give away equity at the outset.

Mezzanine finance is effectively a business loan with a twist. Arrangements can differ but in most cases if you can’t pay back the debt within a pre-agreed timeframe then the debt becomes equity. In other words, the lender gets a share of equity in your business if you default on your loan – you’re using equity as your security. Mezzanine finance is often subordinated to bank debt.

Mezzanine finance comes under the umbrella of private debt (also known as private credit), which includes direct lending and special situations.