Mezzanine financing is a type of loan that a company must repay after its main lender has been paid, but before its shareholders receive any money. In some cases, the lender may also receive a small ownership stake in the company.

UK limited companies use mezzanine financing when they need extra money to fund a business purchase, buy another company, or expand their operations, but cannot raise enough through a traditional bank loan and their own available funds.

Mezzanine finance typically costs 10% to 20% a year, and some specialist funds won't lend below about £2m. On many small-business deals, the gap is filled another way, often by the seller deferring part of the price. (Sources: Development Bank of Wales; Leveraged Buyout Finance, checked 12 October 2026.)

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Mezzanine finance sits between a bank loan and shareholders' money

Mezzanine finance is debt that's repaid after the senior lender (usually a bank) and before the shareholders. It's usually interest-only, with the loan repaid in one go after five to seven years, when the business is sold, or when it's refinanced.

You'll also see it called mezzanine debt, mezzanine capital, or a mezzanine loan. The name comes from architecture, where a mezzanine is a floor between two others.

It's debt with some of the features of equity: the lender takes more risk than the bank, so it expects to be paid more. It usually ranks in this order if the business is sold or fails:

1. Senior debt, such as a bank loan, is repaid first.
2. Mezzanine finance is repaid next.
3. Shareholders get what's left.

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What mezzanine finance costs

Mezzanine finance typically costs 10% to 20% a year, according to the Development Bank of Wales. That cost is usually made up of several parts, so compare the total rather than the headline interest rate.

Each part is paid in a different way, which changes how much cash the business needs each month:

Repaying early can also cost more. Mezzanine loans often carry a prepayment fee for a period after they start, according to PGIM Private Capital, so check the terms before you plan to refinance.

Interest on a business loan is usually an allowable cost for corporation tax. Companies or groups with net interest and financing costs over £2m in a 12-month period may have that relief limited by the Corporate Interest Restriction on GOV.UK. Ask your accountant how it applies to your deal.

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Mezzanine lenders usually rank behind the main lender's security

Mezzanine finance is often secured, but behind the senior lender, and some facilities are unsecured. The mezzanine lender may take a second charge over the same assets and shares that secure the bank loan, so it's only repaid once the bank has been.

The two lenders set out who gets paid first in an intercreditor agreement, a contract signed alongside the loans. According to law firm CMS, it typically covers:

• Which payments the mezzanine lender can receive, and when.
• A block on mezzanine payments if the business breaks the senior loan's terms.
• A waiting period before the mezzanine lender can take action to recover what it's owed.

For you, this means the bank keeps control if trading goes badly, and mezzanine interest can be paused while the senior loan is put right.

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A mezzanine finance example: buying a £1m business

A £1m purchase could be funded with £750,000 of senior debt, £100,000 of the buyer's own money, and £150,000 of mezzanine finance. The figures below are illustrative only.

1. You agree to buy a business for £1m.
2. Your bank offers a senior loan of £750,000, and you put in £100,000 of your own money.
3. That leaves a gap of £150,000, which a mezzanine lender fills.
4. At 10% to 20% a year, interest on the £150,000 would be £15,000 to £30,000 a year, before any arrangement fee, PIK interest, or warrants.
5. You repay the £150,000 in one go at the end of the term, or earlier by refinancing once the business has grown.

In practice, a £150,000 gap is small for this kind of lending. Some specialist mezzanine funds won't lend below about £2m, according to UK debt adviser Leveraged Buyout Finance, because due diligence and legal costs are high for any deal size. On a deal like this, a seller who agrees to be paid part of the price later often fills the gap instead.

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Mezzanine finance compared with senior debt and equity

Mezzanine finance costs more than a senior loan but usually less than giving away shares, because shareholders take the most risk. Equity investors typically expect returns of 20% or more, according to PGIM Private Capital.

This table shows how the three compare on the points that usually matter most to a director:

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The pros and risks of mezzanine finance

Mezzanine finance lets you borrow more and keep more of the company, but it's the most expensive debt you'll carry and the last to be repaid. Weigh both sides against how predictable your profits are.

Before you commit, test whether the business could still cover both loans if trading weakened for a year.

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Mezzanine finance suits established businesses with predictable profits

Mezzanine finance is mostly used by established, profitable companies for management buyouts, acquisitions, growth projects, and property development. Lenders want steady profits that can cover the interest.

The most common uses are:

• A management buyout: managers buy the business they run, with mezzanine finance covering part of the price.
• Buying another business: a company tops up a senior loan to complete an acquisition without bringing in a new shareholder.
• Growth projects: a business funds a new site, market, or production line that should raise profits over several years.
• Property development: a developer tops up the senior development loan.

The Development Bank of Wales notes that strict security requirements, guarantees, and covenants (conditions the business must stick to) can make mezzanine finance unsuitable for smaller businesses.

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Who provides mezzanine finance in the UK

Specialist debt funds and private credit lenders provide most mezzanine finance, alongside some development banks. A corporate finance adviser or debt broker can introduce you to providers and help you compare offers.

Provider types to look at include:

• Corporate finance advisers and debt brokers, who arrange mezzanine finance from a panel of funders.
• Development banks, such as the Development Bank of Wales, which provides loans, equity investment, and mezzanine finance to businesses in Wales.
• Private credit lenders and specialist debt funds, which write most mezzanine loans for buyouts and acquisitions.
• Senior lenders, some of which arrange deals alongside mezzanine providers rather than lending it themselves.

Whoever you approach, expect to share a business plan and evidence of strong cash flow, according to the British Business Bank. Lenders usually look closely at the quality of profits, the management team, and how the loan will be repaid. iwoca doesn't provide mezzanine finance.

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Alternatives to mezzanine finance for buying a business

A seller who defers part of the price, a larger senior loan, an earn-out, or an equity investor can each fill the gap on an acquisition. Which one suits you depends on the size of the deal, how much control you want to keep, and how much the seller trusts the business's future.

Buyers often combine several of these with their own money, which is how much acquisition finance for small businesses is put together.

If you're buying a UK small business valued between £500k and £10m, manda, iwoca's mergers and acquisitions service, arranges acquisition finance as part of the deal. Its transaction managers work with iwoca's unsecured lending and partner secured lenders, so buyers are pre-qualified before they make an offer. Buyers pay nothing to register or browse. A fixed commitment fee applies once your heads of terms are accepted, and a success fee is due on completion.

Buying a business can also stretch working capital in the months after completion. An iwoca Flexi-Loan, a business loan with flexible repayment options, can fund stock, wages, or supplier bills around the deal, from £1,000 to £1m over up to five years. It isn't a substitute for acquisition mezzanine finance. We lend to UK limited companies, and every Flexi-Loan needs a personal guarantee from at least one director. You can repay early at any time with no fee.

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Mezzanine finance in property development

In property development, mezzanine finance is a second-charge loan that tops up the senior development loan, repaid when units sell or the project is refinanced. It lets a developer put in less of their own money, at a higher cost than the senior loan.

Property mezzanine is judged on the project's costs and its value once built, rather than on a trading company's profits. Developers usually arrange senior development finance first and use mezzanine as the top-up.

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Mezzanine finance FAQs

Can start-ups use mezzanine finance?

Mezzanine finance rarely suits start-ups, because lenders want profits that can cover the interest. It's mostly used by established companies and scale-ups, so a start-up is more likely to look at equity investment or a smaller business loan.

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Is a bridging loan the same as mezzanine finance?

A bridging loan isn't the same as mezzanine finance. A commercial bridging loan is short-term funding until a property sells or longer-term finance is arranged, and it's often the only or main lender. Mezzanine finance usually sits behind a senior lender.

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What's the difference between mezzanine and unitranche finance?

A unitranche loan combines senior and junior debt in one agreement at one blended rate, so there's no separate mezzanine lender. Mezzanine finance is a separate loan from a second lender, with its own terms and an intercreditor agreement.

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How long does mezzanine finance take to arrange?

Mezzanine finance usually takes longer to arrange than a bank loan, because there's more due diligence and two lenders have to agree terms, according to the British Business Bank. Build that time into your deal timetable, especially if the seller wants a quick completion.