What is mezzanine finance?

Mezzanine finance is a hybrid form of funding that combines debt and equity financing elements. Typically used for large-scale growth projects, acquisitions, management buyouts and property development, this type of financing helps businesses reach key funding targets while preserving cash flow.

Learn how mezzanine finance works, when it’s often used and how it differs from traditional business loans. 

How does mezzanine financing work?

Mezzanine finance can contain both debt and equity financing components. But how does this work in practice? Well, providers insert equity features in agreements, allowing them to potentially benefit from the company’s future growth as well as earning interest from the loan. 

The equity features also help to compensate for the greater risk they’re taking, as mezzanine agreements rank behind any senior debt the borrowing company may have.

Let’s look at both the debt and equity financing elements of mezzanine finance in more detail: 

The debt financing element

Mezzanine loans have a flexible repayment structure, which combines regular interest payments alongside deferred interest PIK (payment-in-kind), in which interest is added to the principal and paid in a lump sum later on. 

The agreements often include a “bullet payment”, where the principal is repaid at the end of the term or after a future event or condition, such as an acquisition timeline or the completion of property sales. This helps to maintain good cash flow during the project.

The equity financing element

Businesses often seek mezzanine finance to get additional capital for large projects/acquisitions without giving up as much control or future profits to equity investors or having the burden of monthly loan instalments from bank loans.

Mezzanine finance providers can include an equity financing element (known as an equity kicker), such as a warrant or equity conversion option. The warrant gives the lender the right to buy shares in the company at a pre-agreed price, which they can exercise if the company enjoys significant growth. The conversion option allows them to convert a proportion of the debt into shares if certain conditions are met or specific events occur.

Mezzanine agreements can be secured or unsecured, depending on the deal and whether the lender requests an equity pledge (over shares and assets). But even when secured, they rank behind any senior loan security.

When to use mezzanine finance solutions

Mezzanine finance is often used when conventional business loans don’t provide enough funds for a project, or when the capital needed to repay a loan will only be unlocked down the line. This hybrid financing gives businesses access to greater sums to meet project needs and timelines, without impacting cash flow.

Here are the more common uses of mezzanine finance in the UK:

• Business acquisitions and management buyouts: Mezzanine finance can provide additional capital beyond senior loans, and without the need for significant equity investment, to cover funding shortfalls and unexpected costs or delays. 

• Growth projects/expansion: It can provide significant funding when moving into new markets, opening new offices/branches/sites and expanding production.

• Property development: A mezzanine finance agreement can add a layer of funding beyond existing property development finance, giving breathing space to manage multiple projects.

Note that this is not an exhaustive list and to seek professional advice prior to taking out a credit facility. This guide is for informational purposes only and not intended to be viewed as financial advice.

Mezzanine finance vs a standard business loan

Many businesses turn to mezzanine finance to bridge funding gaps or align borrowing with the timelines of large-scale growth projects, rather than taking on a standard loan that involves regular monthly repayments. 

We’ve outlined the main benefits of mezzanine finance and the potential drawbacks when compared to using a more conventional loan: 

Main advantages of mezzanine finance

• Combined debt and equity finance can unlock funds beyond what some businesses might get from traditional loan providers, supporting large-scale projects.

• The repayment structure (often including deferred payments) can ease cash flow during key project milestones.

• The solution can bridge funding gaps to raise capital beyond the limits of existing loans you may have secured. 

• It reduces reliance on greater equity investment and, in some cases, equity conversion only kicks in under certain circumstances.

• Repayment terms often align with your cash flow and your acquisition/property development/expansion project timelines.

Downsides compared to standard business loans

• Mezzanine finance usually has higher costs than standard loans due to increased lender risk (including the fact that senior loans take a first charge on unpaid debt).

• Entering into a mezzanine finance agreement means giving the lender either warrants for a percentage of shares/ownership or an option to convert debt into equity.

• Negotiations can be complicated as they often involve working out equity agreements and repayment terms, risk assessment and due diligence, depending on project scope.

• The application and approval process can take longer than most business loans. 

Mezzanine finance vs standard business loans: comparison table

How Funding Circle can help

While Funding Circle doesn’t offer mezzanine finance agreements, we provide flexible, affordableunsecured business loans of up to £750,000 to support growth, expansion and acquisitions.

Mezzanine finance can come with higher interest rates and involves equity components that can dilute control and future profits. So, if you think a simpler form of financing might be more suitable, explore our term loan options for small businesses. 

You don’t need to give up any business equity or use assets or other collateral as security for the loan, but you may need to provide a personal guarantee. It is important to seek professional legal advice before entering into a personal guarantee. 

Funding Circle loans are available to:

• Limited companies based in the UK

• Businesses that have been trading for at least a year

Our term loans let you repay the money borrowed over affordable monthly instalments, from as little as 6 months to as long as 6 years, depending on your needs. Use our business loan calculator to see what you could potentially borrow. 

Interest rates for our business loans start at 6.9% per year with no additional early settlement fees, so you can overpay when it suits or settle the whole loan when your cash flow allows. Apply for a Funding Circle loan online now and get a decision in as little as 5 minutes.

*Please note that rates and credit limits are assessed on an individual basis and subject to a full credit assessment. 

Mezzanine finance FAQs

How is mezzanine finance different from a normal business loan?

Most business loans provide a lump sum of capital to be repaid monthly, plus interest. Mezzanine finance usually involves some deferred interest and bullet payments, where the principal is repaid at the end of the loan term or after a specific event. It also includes equity components, which can offer lenders a slice of the company’s future growth and reduce their risk. Traditional business loans are purely debt finance solutions with no equity pledges. 

Is mezzanine finance secured or unsecured?

Mezzanine finance can be secured or unsecured, determined by the terms of the agreement. Security can be a pledge over shares or assets, but it still sits behind senior loan or mortgage provider security. When unsecured, the lender can include equity kickers, like warrants or conversion options, to compensate for the increased risk, while charging higher interest rates.

What happens if a business can’t repay mezzanine finance?

If a business can’t repay the mezzanine finance, lenders can enforce the rights included in the agreement, such as certain equity pledges. However, if senior debt is in place, mezzanine lenders rank behind them, meaning they can only recover assets or equity after the higher-ranking debt is recouped.

Is mezzanine financing a form of debt finance?

Technically, yes, as it’s treated as a liability to the business and involves a loan to be repaid. But mezzanine finance is generally classed as a hybrid form of financing, as it combines debt and equity finance elements. Providers can include an equity option, such as a pledge, warrant or conversion right, so they can potentially benefit from the company’s future success in addition to the interest gained from the loan

Disclaimer

30/09/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.