Mezzanine finance: the layer that closes the gap without diluting you.

Mezzanine loans work like a senior facility with the ranking reversed and the cash pressure removed. A typical UK mezzanine loan runs five to seven years, six months to a year longer than the senior facility that sits above it, so the senior lenders are repaid first and the mezzanine provider is not competing for the same cash. There is no amortisation. The principal repays as a bullet on maturity, on a sale of the business or on a refinancing, which is why mezzanine providers spend as much time underwriting the exit as the trading forecast.

Security is second-ranking over the same assets and shares that secure the senior debt, and the ranking is documented in an intercreditor deed. That deed is the heart of the deal. It blocks mezzanine payments if the senior covenants are breached, imposes a standstill period before the junior lender can enforce, and sets out who controls a sale of the security. Mezzanine funds also take a board observer seat, monthly information rights and a veto over further borrowing, disposals and dividends, so the relationship is closer to an investor than a lender even though the paper is debt.

Mezzanine financing pays its provider through three components. Cash interest is paid quarterly and sized so the business can afford it alongside the senior debt service, often in the region of 8 to 10%. Payment-in-kind interest, universally shortened to PIK, accrues on top and rolls into the principal instead of being paid, so it costs the company nothing in cash until repayment and compounds in the meantime. Warrants, or an equivalent equity instrument, give the provider a small share of the equity upside on exit.

Added together, all-in mezzanine pricing across our funder panel runs at an indicative 12% to 18% including PIK including PIK, indicative as of September 2026. The mix matters more than the total. A facility weighted towards PIK preserves cash for growth but leaves a much larger balance to refinance at maturity, and PIK interest that has compounded for six years can nearly double the amount repayable. A facility weighted towards cash interest costs less in the end and squeezes the business harder each quarter. Interest is generally deductible against corporation tax at the 25% main rate, subject to the corporate interest restriction where group net interest exceeds £2 million, which is a question for your tax adviser.

When you expect the business to be worth materially more on exit than it costs today. Mezzanine finance is expensive money with a fixed price. Equity is cheap on the day it arrives and open-ended afterwards, because a shareholder keeps their share of every pound of value created for as long as they hold it. The comparison is between a known coupon and an unknown share of an unknown future valuation, and equity partners expect a say in the business as well as a return on it.

Put numbers on it. A team buying a business for £18 million needs the last £3 million. Sold as equity at the purchase valuation, that is roughly 17% of the company. If the business is worth £30 million in five years, that stake is worth about £5 million and it never comes back. Take the same £3 million as mezzanine at an indicative 14% blended, hold it for five years, and the total cost of interest and repayment is around £6 million, of which the £3 million principal was money you never had to find. Add warrants over 2 to 3% and the mezzanine route still leaves the management team owning far more of the business. Illustrative figures only, and the conclusion reverses if the exit valuation disappoints, because debt has to be repaid whatever happens to value.

The same arithmetic drives most management buyout funding decisions, and sits behind the private equity buyout structures we work on.

The pros and cons of mezzanine financing divide cleanly. The advantages are access, flexibility and ownership. Mezzanine gets a deal to a price senior debt alone cannot reach, it can be structured so that little or none of the coupon is paid in cash in the early years, the interest is generally tax deductible where dividends are not, and the existing shareholders keep the equity upside. For an acquisitive group it also creates a repeatable funding layer, sized once and drawn as bolt-ons appear.

The disadvantages are cost, complexity and risk. It is the most expensive debt in the structure, the intercreditor negotiation and dual due diligence add weeks and legal fees to a timetable, and lead times are longer than a bank facility because a fund investment committee is involved. Above all, leverage cuts both ways: a business carrying senior and mezzanine debt has far less room for a bad year, and PIK interest keeps compounding while trading recovers. No leveraged structure carries a promise that it will work, which is why the sizing conversation matters more than the pricing one. Weigh the pros and cons against a real structure and a real downside case rather than in the abstract: the same facility that rescues one transaction overloads another, and the disadvantages only show up in the year the forecast is missed.

The ranking idea is identical; the underwriting is not. In property development and real estate, mezzanine loans are second-charge facilities that top up senior development finance, taking the loan to cost from around 65% to 85% or more, repaid from unit sales or a refinance onto an investment loan. Real estate mezzanine financing is sized against gross development value and build costs rather than earnings, and it is priced monthly rather than as an annual coupon. Bridging loans are a different product again, short-term facilities secured on the asset rather than a junior layer above another lender.

This desk arranges corporate mezzanine financing: the junior debt in acquisitions and buyouts, sized on EBITDA and free cash flow. Mezzanine development finance for house builders and commercial schemes sits with our sister businesses in the Construction Capital portfolio, and where a transaction has both a trading and a real estate element we structure the two together rather than letting one lender price the whole risk. If your search started with property, the distinction is worth making early, because the two markets share a name and very little else.