Mezzanine 

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Mezzanine finance is usually more expensive than a regular bank loan, but can be a useful source of top-up funding for fast-growing companies and firms in a leveraged buyout. It is in effect a second mortgage to provide additional funding and can cover development costs including land and building costs.

Mezzanine finance can be used to fund capital expenditure, buyouts or acquisitions or to refinance existing debt. It can also be used for capital reorganisation, to allow shareholders to cash in on their investment.

Mezzanine finance combines elements of senior debt, such as a conventional bank loan, and equity funding. A mezzanine finance provider will lend money and in return will receive not just fees and interest but also a share in the future growth of the business.

Mezzanine finance is typically used in situations that banks and building societies consider too high risk to agree to a term loan. Whereas private equity funding would usually involve surrendering a sizeable proportion of equity in the business, mezzanine finance provides a happy medium under certain conditions.

The perceived higher risk is the reason why mezzanine finance typically demands a higher return at final maturity of 3-4 per cent above the base rate to compensate the lender. Equity is granted to the lender in the form a warrant, a solution that does not dilute the borrower's shareholding in the company.

A great advantage of mezzanine finance is its flexibility. Depending on the borrower's needs, it can take the form of a secured subordinated loan with equity warrants, a convertible loan or preference shares.

Another key benefit of mezzanine finance is that the premium paid to compensate the lender for the perceived higher risk is payable as a one-off arrangement, rather than an ongoing monthly payment over a number of years. This means that the extra burden is not putting pressure on the firm's cash flow and can often be redeemed through a subsequent refinancing arrangement.

Mezzanine finance is ranked after bank loans in terms of the right of repayment in case of financial difficulties, but ahead of equity. Mezzanine finance is available from high street banks and building societies as well as specialist lenders.

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