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Growing companies often find themselves in a financial “middle ground.” Traditional bank loans may not provide enough capital, while raising equity could mean giving up too much ownership. That’s where mezzanine financing comes in—a flexible hybrid that combines features of both debt and equity.
For mid-sized companies pursuing acquisitions, expansions, or buyouts, mezzanine financing can be the bridge that makes the deal possible.
What Is Mezzanine Financing?
Mezzanine financing is a form of capital that sits between senior debt (like bank loans) and equity in a company’s capital structure.
- Typically structured as subordinated debt (ranked below senior loans in repayment priority).
- Often unsecured but comes with higher interest rates.
- Includes an equity kicker (warrants or conversion options) to give lenders upside if the company succeeds.
In short, mezzanine financing is high-risk, high-reward for investors—and highly flexible for businesses.
Key Features of Mezzanine Financing
- Hybrid structure: Debt + potential equity conversion.
- Higher cost of capital: Rates often range from 12%–20%, reflecting risk.
- Subordinated position: Paid after banks, before equity holders.
- Customizable terms: Tailored repayment schedules, interest-only options, or profit participation.
When Businesses Use Mezzanine Financing
- Growth Financing
- Expanding into new markets
- Launching new product lines
- Scaling operations quickly
- Expanding into new markets
- Acquisitions and Buyouts
- Bridging funding gaps in leveraged buyouts (LBOs)
- Financing management buyouts (MBOs)
- Supplementing senior debt in acquisitions
- Bridging funding gaps in leveraged buyouts (LBOs)
- Recapitalizations
- Refinancing existing debt
- Providing liquidity to shareholders without a full sale
- Refinancing existing debt
Pros and Cons of Mezzanine Financing
Pros
✅ Provides capital when senior debt or equity isn’t sufficient
✅ Flexible repayment and structuring
✅ Preserves majority ownership compared to pure equity
✅ Can improve returns for equity holders by leveraging growth
Cons
❌ More expensive than bank debt
❌ Increases leverage and repayment obligations
❌ Investors may gain equity rights if repayment fails
❌ Not suitable for companies with unstable cash flows
Mezzanine Financing vs Debt vs Equity
| Factor | Senior Debt (Loans) | Mezzanine Financing | Equity Financing |
| Repayment Priority | First | After debt, before equity | Last (residual claim) |
| Cost of Capital | Lowest (4–10%) | Higher (12–20% + equity kicker) | Highest (full dilution of ownership) |
| Ownership Impact | None | Potential partial dilution | Significant dilution |
| Flexibility | Low (strict covenants) | Medium–High (customizable terms) | High (no repayment obligation) |
Context in the U.S. and Canada
- United States: Widely used in private equity transactions, especially in leveraged buyouts. Specialized mezzanine funds often work alongside PE firms and banks.
- Canada: Growing use among mid-market companies, with BDC Capital and private funds offering mezzanine loans for growth and acquisitions.
Right for Your Business?
Consider mezzanine financing if:
- Your company has strong cash flow to cover higher interest payments.
- You want to avoid major equity dilution.
- You’re pursuing a transaction too large for bank debt alone.
You’re open to giving lenders potential equity upside in exchange for flexibility.
Summary of References
Exploring mezzanine financing for growth, acquisitions, or recapitalization? Agile Solutions helps companies in the U.S. and Canada structure hybrid capital solutions and connect with mezzanine lenders that align with your strategy.
👉 Book a consultation today at agilesolutions.global or email us at info@agilesolutions.global
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