mezzanine financing
A hybrid of debt and equity financing, typically used in leveraged buyouts, that gives lenders the right to convert to equity if the loan is not repaid.
Example
“The LBO used $50M in mezzanine financing to bridge the gap between senior debt and equity — expensive but flexible.”
Memory Tip
MEZZANINE = the middle floor of capital structure. Between senior debt (basement) and equity (penthouse).
Why It Matters
Mezzanine financing matters because it represents a middle ground between pure debt and pure equity, offering investors higher returns while giving borrowers more flexibility than traditional loans. Understanding this concept helps you recognize different funding options available for business expansion and how risk and control are distributed among investors.
Common Misconception
Many people mistakenly believe mezzanine financing is only for large corporations, when in reality it is commonly used by small to medium-sized businesses and startups that need capital but want to avoid diluting ownership too much. Another misconception is that it works exactly like a regular loan, when the equity conversion feature fundamentally changes its risk profile and repayment dynamics.
In Practice
A company seeking to expand might borrow $2 million in mezzanine financing at 12 percent interest with an equity conversion option. If the company struggles and cannot repay the full amount after three years, the lender can convert their remaining debt into a 15 percent stake in the company, turning their failed loan into partial ownership and potential long-term returns.
Etymology
MEZZANINE (a middle floor between main floors) FINANCING. Sits in the MIDDLE of the capital structure — between debt and equity.
Common Misspellings
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See Also
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