Mezzanine financing can be defined as those loans taken by the companies which are unsecured and which are ranked after secured debt but before equity in the event of company becoming bankrupt. Hence if company goes into liquidation secured debt holders will be paid first then mezzanine debt and lastly equity shareholders. Since Mezzanine finance doesn’t require any collateral they offer higher rate of interest than normal debt.
Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. In simple words it is a hybrid of equity and debt.
Mezzanine finance is used for leveraged buyouts (it refers to buy out of a company’s shares or assets by using high proportion of debt using the assets being purchased as leverage), as well as existing companies which have a track record of good profitability and goodwill in the industry use it for expansion purpose, it also used by real estate companies when they find it difficult to raise loans from traditional sources.