The word mezzanine actually comes from the Latin word for the middle, or median. This conveys quite accurately the place of various types of mezzanine funding today, which can be either in the form of equity or debt financing. Mezzanine investment is simply investment capital a company can obtain during an in-between stage, a way to bridge the gap between two funding sources. As such, companies that get this kind funding are usually neither small nor large businesses. They typically have very specific goals for which to use this funding, such as making an acquisition or performing a merger, or maybe refinancing, restructuring, or simply pursuing a viable economic opportunity for growth. Mezzanine investment capital is actually becoming more prominent today, as banks and other financial institution lenders are making it easier for companies to meet their minimum requirements for acquiring funding.
Mezzanine funding in general is both higher yield and higher risk than other sorts of loans, for a few different reasons. Because of the higher yields many firms are more actively seeking this form of funding. But in order for lending institutions to carry the additional risks they ask for a great deal in return, jumping up interest rates compared to regular loans and often taking a stake in the company’s equity.
One other thing that sets a mezzanine investment apart from other kinds of funding is that the debt is also in a middle position, falling between senior debt and a company’s equity, so that it in the event of default a mezzanine investment is collected on prior to stock, but after the senior debts.
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