{"id":208545,"date":"2025-07-30T08:51:44","date_gmt":"2025-07-30T15:51:44","guid":{"rendered":"https:\/\/www.nationalfunding.com\/blog\/?p=208545"},"modified":"2025-07-07T16:03:00","modified_gmt":"2025-07-07T23:03:00","slug":"when-mezzanine-financing-makes-sense-for-small-business","status":"publish","type":"post","link":"https:\/\/www.nationalfunding.com\/blog\/when-mezzanine-financing-makes-sense-for-small-business\/","title":{"rendered":"When Mezzanine Financing Makes Sense for Small Business"},"content":{"rendered":"

Mezzanine financing is a type of small business funding that combines elements of regular debt, like interest payments, collateral, or requiring personal guarantees, with elements of equity funding when the financing can be converted into ownership of the company.\u00a0\u00a0<\/span>\u00a0<\/span><\/p>\n

Businesses normally use mezzanine financing when traditional and alternative lenders won\u2019t approve them for another <\/span>small business loan<\/span><\/a>, or the new loan will not offer enough funding. Small business owners also use mezzanine financing when they don\u2019t want to give up a high percentage of future profits, as equity investors are sometimes involved with this type of funding and each one becomes a partial owner of the business.\u00a0<\/span>\u00a0<\/span><\/p>\n

The Three Types of Mezzanine Financing<\/span>\u00a0<\/span><\/h2>\n

There are three types of mezzanine financing, including subordinated debt, convertible debt, and preferred stock.\u00a0<\/span>\u00a0<\/span><\/p>\n

Subordinated debt is like a regular business loan, but lenders charge higher interest rates since they\u2019re taking on more risk, because <\/span>\u201csubordinated\u201d<\/span><\/i> means the lender is lower in line to recoup any losses in case of a default. A second mortgage is an example of subordinated debt where real estate is the collateral, but the subordinate lender gets paid only after the first mortgage is paid in full.<\/span>\u00a0<\/span><\/p>\n

Convertible debt gives lenders an option to convert the business loan into equity ownership of the company where they will be paid from profits. Convertible debt starts with monthly payments plus interest like a regular business loan. If the lender chooses to <\/span>\u201cconvert,\u201d<\/span><\/i> they buy shares in the company at an agreed-upon price; the company no longer pays the debt; and the lender becomes a part owner and gets paid from profits.<\/span>\u00a0<\/span><\/p>\n

Redeemable preferred stock is equity shares, where the company can buy them back at an agreed-upon price. This works by selling shares of the company to equity investors and paying them a dividend per share, which is usually a percentage of the price per share. The company also pays these investors a share of all future profits unless the company <\/span>\u201credeems\u201d<\/span><\/i> the shares (i.e., they buy them back at an agreed-upon price, which is usually higher than the original investment).\u00a0<\/span>\u00a0<\/span><\/p>\n

If you\u2019re considering new funding for your business, here\u2019s when mezzanine financing can make sense and when alternatives may be a better choice.<\/span>\u00a0<\/span><\/p>\n

When Mezzanine Financing Works for Small Business<\/span>\u00a0<\/span><\/h2>\n

Mezzanine financing works well for small business when:<\/span>\u00a0<\/span><\/p>\n