TL;DR: Mezzanine financing is a hybrid of debt and equity that sits between senior debt and equity in the capital stack. It is subordinated to senior debt and usually carries higher interest plus an equity component such as warrants. It lets companies raise additional capital without a full equity round, at a higher cost than senior debt.
Mezzanine financing is a layer of capital that ranks below senior debt but above equity. It is repaid after senior lenders in a default or wind-down, which makes it riskier for the lender and therefore more expensive for the borrower. To compensate for that risk, mezzanine lenders typically charge higher interest and negotiate an equity component, often warrants, on top.
The name reflects its position: a middle floor in the capital stack, between the senior debt above and the equity below. Companies use it to add capital beyond what senior lenders will provide without raising a full priced equity round.
Mezzanine and venture debt overlap but are not identical. Mezzanine is defined by its junior position and equity kicker, and is common in buyouts and later-stage financings. Venture debt is defined by its focus on high-growth, revenue-generating companies and is structured around their trajectory; it can sit in a senior or subordinated position depending on the deal, and carries only modest equity upside. The structure of any given facility is set deal by deal.
Is mezzanine financing debt or equity? Both. It is structured as subordinated debt with an equity component, which is why it is called a hybrid.
Why is mezzanine more expensive than senior debt? Because it is repaid after senior debt, the lender takes more risk, and that risk is priced into higher interest plus equity upside.
Related terms: Subordinated Debt · Senior Debt · Capital Stack · Warrant
