Mezzanine finance is used to describe forms of finance that have characteristics of both debt and equity. They are typically used to finance MBOs or expansion.
Mezzanine finance often has one or more of these characteristics it:
- ranks after normal debt but before equity in the event a company fails
- pays higher interest rates than other debt
- is convertible into shares
- is repayable after a long term, typically seven to ten years, so it does not drain cash flows on the meantime.
Its exact nature will vary depending on the needs of the business concerned and the suppliers of the mezzanine finance.