Mezzanine is a loan that makes it possible to finance the dynamic development of a company’s activities or to restructure its capital structure.

Mezzanine is a loan that makes it possible to finance the dynamic development of a company’s activities or to restructure its capital structure. It sits between a classic loan (senior debt) and capital from investors or shareholders in the form of shares (equity). Despite being debt, it is beneficial to entrepreneurs as it is treated as capital on the company’s balance sheet. The cost of financing is between the price of bank debt and the price of equity.

The word 'mezzanine’ means mezzanine and, in the language of finance, this term is used to describe an inflow of funds when it is no longer possible to obtain financing from traditional sources. Mezzanine originated in the USA and its history dates back to the 1970s. At that time, the basis for its development was the loan market provided by insurance companies and savings banks. It came to Europe in the late 1980s. Specialised funds played a major role here, feeding into the private equity market.

Mezzanine financing can be applied for by companies that have good growth prospects but face difficulties in obtaining financing because the investments involve high risk. The instruments used in mezzanine financing are selected so that the cost of financing depends on the performance of the planned venture, and so that they allow for repayment of the capital at the end of the financing period and limit the cost of servicing in the first period after the conclusion of the agreement.

Mezzanine can be in the form of bonds, loans or preference shares, but whatever the form, it has adequate collateral. The investor therefore does not risk losing the funds altogether. In return for their transfer, he or she obtains security over the company’s assets, in the form of a pledge or even a mortgage on real estate.

Contracts are concluded for 5-10 years, shifting the main burden of payment with interest (repayment of the entire principal) to the end of the contractually agreed period. However, another solution is possible – the obligation can be repaid earlier, e.g. with a new loan, as long as the company is able to take it out, i.e. as long as its situation improves.

Mezzanine is often tailored to each case, characterised by its flexibility. The rescheduled repayment of liabilities allows for greater freedom in cash flow management, which translates into more efficient growth for the company in question, while meeting its capital needs.