Definition

Mezzanine financing

Mezzanine financing is a business loan that offers repayment terms adapted to a company’s cash flows. It is a hybrid of debt and equity financing—similar to debt financing in that you need cash flow to repay the loan, but with repayment terms that are more flexible than conventional debt financing.

Also known as subordinated financing, the term mezzanine financing refers to the fact that this type of loan is typically not secured by the assets of the company and ranks below secured debt in repayment priority in case of default. For this reason, it carries more risk for lenders and comes with correspondingly high interest rates.

Companies use it, for example, to increase their working capital, fund an acquisition or finance the transfer of a business to family members or the management team.

A key benefit of mezzanine financing is that the loan is usually treated as equity on the balance sheet, so it does not count as debt in the calculation of the company’s debt-to-equity ratio. This improves its leverage position and makes it possible for the company to borrow in other ways (e.g., through standard bank loans).

To receive mezzanine financing, companies must typically have an established reputation, solid product offering, history of profitability and realistic growth plans.