Mezzanine debt

Definition

Junior debt above equity, priced higher and repaid after the bank.

Why It Matters

The cost is real and it is not only the rate. Mezzanine paper usually carries covenants of its own and warrants that dilute you later, so the cheap-looking gap it fills is paid for in equity you do not feel yourself giving up on closing day.

In numbers: On a $4M deal where the bank lends $2.7M, $530k of mezzanine at 14% plus warrants can bridge to a smaller equity check; the extra debt raises the payment and the risk, so it earns its place only when the cash flow clears both layers.