Mezzanine finance funding can come in the form of stand-alone subordinated debt or equity transactions. Most often it is found in the form of subordinated debt. Mezzanine financing is a great alternative to other forms of financing where interest in the company must be given up. It is more of a mix between traditional debt and equity financing and retains some benefits from both. Since there is no collateral required to secure mezzanine financing, interest rates are typically very high. Sometimes interest can be as high as 20-30%. If the borrower defaults on the loan, the lender providing the mezzanine financing has the right to convert their stake to ownership in the company if they choose.
This additional financial leverage can facilitate:
- Mergers and acquisitions financing
- An emerging growth opportunity
- Management or other leveraged buyout
- Corporate debt refinancing
- Corporate restructuring
As subordinated debt, the rate and terms of funding usually correlate with the position it holds in the company’s funding rounds. As a later-stage investment, its position is in the final round of financing prior to an IPO. If committed at a later stage it has less risk and is less expensive than just past the startup level.