What is mezzanine finance?
Mezzanine is a hybrid form of finance: legally a loan, but economically partly risk-bearing capital. The provider ranks behind the bank or senior lender, but ahead of shareholders. The lender requires a higher return for that additional risk.
How is the return structured?
- Cash interest: the portion you pay periodically, often 6% to 8%
- PIK interest: interest added to the principal and only paid at the end
- Warrant or equity kicker: the right to a small equity stake or a bonus on sale
In total, this often amounts to an effective return of 12% to 18% for the lender.
Why do business owners choose this?
The main advantage is that you retain control. You raise capital without selling part of your business at its current valuation. If you expect the value of your business to rise significantly over the coming years, this is often cheaper than issuing shares.
Typical uses
- Financing an acquisition: mezzanine bridges the gap between bank finance and your own contribution
- Management buy-out: management rarely has sufficient funds of its own
- A step change in growth: a new site, production line or international roll-out
- Buying out a shareholder: for example, as part of business succession
What should you look out for?
- Cash flow pressure at the end: PIK interest accumulates. Make sure the exit or refinancing is realistic.
- Subordination: the bank must agree to the ranking arrangements.
- Dilution clauses: read carefully how the equity kicker works at different exit valuations.
Worked example
Suppose you acquire a business for €10 million. The bank provides €4 million and you contribute €2 million in equity. With €4 million in mezzanine finance, you do not need to bring in an external investor. If you sell in five years for €18 million, the vast majority of the increase in value stays with you.
Conclusion
Mezzanine is expensive per euro, but inexpensive in terms of dilution. For business owners with a strong growth plan and confidence in their business's future value, it is often the smartest intermediate step.
Sources and scope
Examples and policy choices in this article are illustrative, not a current quotation, fixed standard or financial or legal advice. The editorial revision date relates to the summary, structure and source references; it is not a reference date for the underlying data.
| Primary source | What is it used for? |
|---|---|
| KVK (Dutch Chamber of Commerce) — checking business partners | Company identification and checks on business partners. |
Source links support the topic mentioned, but do not automatically substantiate all percentages, time frames or examples in this article. Check current terms and rules with the responsible authority.
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