What Are Mezzanine Loans?

Mezzanine loans are a particular type of subordinate loan made based on an equity or profit share in the venture. The loans are subordinate to senior loans, meaning they will be the last to be paid off in the case of bankruptcy. They can provide a borrower with additional capital needed when senior lenders impose limits on financing.

Mezzanine loans are often used in large real estate or commodity ventures which require a high degree of initial capital. The borrowing company seeks mezzanine lenders by showing a concrete business plan. The mezzanine lender then determines the potential for profit based on the business plan, and other factors. 

Mezzanine loans tend to be very flexible because they are a long-term investment in a company. The lenders look to arrange detailed specifications for the exact dates projects must be completed, anticipated profits and other restrictions on the company's actions. In some cases, a mezzanine lender may even request a seat on the board of the company or voting privileges. Many borrowers do not like to cede this control, but sharing equity in a company is a great way to secure a high amount of financing even if your balance sheet is less than perfect.