How Mezzanine Financing Fits into the Capital Stack

Sitting between debt and equity, mezzanine financing offers a flexible solution for bridging the gap between your current raised capital and the funds you need to complete a project and reach your goals.

An important part of understanding how mezzanine financing works is understanding its place within the overall financial structure of your business or investment project.

We’ll call this structure the capital stack.

Breaking Down the Capital Stack

As you can see, the bulk of the capital stack is typically reserved for senior debt—such as mortgages or other secured funding.

At the top is your own investment or common equity.

Mezzanine financing slots into the middle to help provide added capital. Financing costs often range between 12% and 20% depending on the terms and amounts involved.

This is because mezzanine debt is subordinated to senior debts. Should you face foreclosure or bankruptcy, or default on your loans, mezzanine lenders are paid after senior debt.

Depending on the terms of your financial agreement, these costs typically come in the form of:

  • Interest
  • Payable-in-Kind Interest (Deferred interest rolled into the total sum repaid)
  • Ownership stakes
  • Preferred stock options

This allows lenders and investors to see a greater return for their risk without directly passing the entire cost along to you. It also helps to reduce the impact on cash flows, further improving your ability to leverage your new capital for growth and success.

In most cases, mezzanine lenders execute agreements with both the equity holder—mezzanine debt agreements—and the senior lenders—intercreditor agreements. This ensures that all parties in the capital stack know their legal rights, interest in the property and cures available in the event of default

Since mezzanine lenders are working with multiple parties, creating a solution that works for everyone involved often takes time. However, the additional access to capital, flexible terms and reduced equity investment often outweighs the wait to secure funding.

As with all forms of financing, mezzanine financing carries risk. Especially in agreements that include equity warrants. If you cannot meet the terms of your agreement, you might lose control of your business.

Want to Know More About Mezzanine Financing?

For an in-depth look at other considerations, consult our Guide to Mezzanine Financing. It covers a range of topics not mentioned here and provides a comprehensive look at why you might use mezzanine debt to reach your goals.

Of course, sometimes it’s easier to consult an expert and talk things out…

If you’re looking for an experienced broker to help you navigate the complexities of finding a mezzanine lender and securing a financial solution, UT Financial Services, LLC, wants to help.

For more than 20 years, we’ve helped businesses find capital to reach their goals. Our extensive network and in-depth understanding of structured financial solutions allows us to create value for our clients and offer a level of service you won’t find anywhere else.

Click the button below to reach one of our analysts. With a quick consultation, we can assess whether a mezzanine loan is a good fit for your current situation and goals. We’re also happy to outline other options and walk you through the process from start to finish.

This website and blog is a publication of UT Financial Services, LLC. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.

Purpose of this blog is to give general education and information about investing and business financing. Information on this website and blog do not involve the rendering of personalized investment advice. No content should not be construed as legal or financial advice.

Consult a professional advisor before implementing any of the options presented.