Mezzanine debt is subordinated, higher-cost debt that sits between senior loans and equity in a company’s capital stack, usually with warrants or another equity feature. Senior debt is the cheapest, first-priority layer; unitranche combines senior and junior debt into one loan at one blended rate; and mezzanine fills the gap between what senior lenders will provide and what the owners are willing to contribute as equity.
For a CFO planning an acquisition, buyout or recapitalization, the choice among these layers drives cost, covenants and control. This guide from Commercial Finance Partners compares them side by side and walks through a sample capital stack.
Where Does Mezzanine Debt Sit in the Capital Stack?
The capital stack ranks each source of money by its claim on cash flow and on assets in a default. From most senior to most junior:
- Senior secured debt: asset-based revolvers and senior term loans with a first lien on the assets.
- Unitranche debt: when used, it replaces the senior and junior layers with a single loan.
- Second-lien or junior capital: secured debt that ranks behind the senior lender.
- Mezzanine debt: subordinated debt, often unsecured or with a junior lien, repaid only after senior debt is current.
- Preferred and common equity: the owners’ capital, which absorbs losses first and keeps the upside.
Each step down the stack carries more risk for the capital provider, so each step costs the company more.
How Do Senior Debt, Unitranche and Mezzanine Compare?
| Feature | Senior debt | Unitranche | Mezzanine |
|---|---|---|---|
| Priority | First lien, paid first | One loan with one lien package | Subordinated to senior debt |
| Typical pricing | Lowest; floating spread over a benchmark rate | Blended rate between senior and mezzanine pricing | Highest debt cost; cash coupon plus PIK interest and often warrants |
| Covenants | Varies widely; syndicated term loans are often covenant-lite, and a senior facility’s tests are often tighter than the mezzanine tests alongside it | Typically at least one financial maintenance covenant, usually a maximum leverage ratio | Often incurrence-based, high-yield style; any maintenance tests are often more permissive than the senior facility’s |
| Term | Often about 5 years for senior leveraged loans | Often 5 to 7 years, with low scheduled amortization | Typically 5 years or longer, often maturing after the senior facility |
| Prepayment / call protection | Often lighter than on junior debt; call protection is more common in high-yield debt than in bank debt | Typically a declining prepayment premium (for example 102, then 101) or a soft call limited to repricing refinancings | Often a no-call period or a declining premium (for example 103, 102, 101); typically more robust than on senior debt |
| Equity dilution | Less common than in mezzanine; some senior lenders also receive warrants or equity co-investment rights | Some direct lenders also seek warrants | Often warrants or options for about 1% to 5% of the company’s equity, or a co-investment or conversion right |
| Typical deal size | Varies widely with the borrower’s size and collateral; from small bank facilities to very large syndicated loans (the Federal Reserve reported a median 2025 leveraged loan of about $275M) | Regions describes a typical unitranche loan as about $100M to $200M | PGIM Private Capital lists subordinated debt investments of $10M to $100M+; the SBA reports typical SBIC loans of $250K to $10M |
These are typical market characteristics, not quotes, and terms are negotiated deal by deal. Deal-size sources do not line up: Regions puts a typical unitranche loan at about $100,000,000 to $200,000,000, while the Federal Reserve’s 2025 medians were about $20,000,000 for private credit loans of all types and about $275,000,000 for leveraged loans, so treat any single figure as a rough guide. For comparison, Commercial Finance Partners’ Debt Capital Advisory group typically arranges $10,000,000 to $250,000,000 of financing for companies with $3,000,000 to $30,000,000 of EBITDA; that is CFP’s own range, not a market-wide figure.
Sources: Simpson Thacher, Mezzanine Finance: Overview (Practical Law, 2013); Proskauer, Call Protection (United States), 2023; Proskauer, Broadly Syndicated Loan and Private Credit Markets, 2025; Federal Reserve FEDS Note, August 2026; Regions, What Is Unitranche Financing?; Unitranche financing: an introduction (Jones Day, 2020); PGIM Private Capital, Mezzanine Debt Financing; SBA, Investment Capital (SBIC); PennantPark Investment Corp., Form 10-K, fiscal 2011.
What Does Mezzanine Financing Cost?
Mezzanine pricing has three parts: a cash coupon paid currently, PIK interest that accrues to principal, and warrants or an equity kicker.
- Cash coupon: the interest paid in cash each period. According to ABF Journal, cash interest on acquisition mezzanine typically runs 8% to 12%, within an all-in cost of 10% to 14% in 2026.
- PIK interest: “paid-in-kind” interest that accrues to principal instead of being paid in cash, preserving cash flow. ABF Journal puts typical PIK interest at 2% to 4%.
- Warrants or equity kicker: the right to buy a small percentage of the company, which raises the lender’s total return if the business grows.
For a public benchmark, the SBA reports that a typical SBIC loan runs $250,000 to $10,000,000 at 9% to 16% interest, and debt-with-equity financing from SBA-licensed Small Business Investment Companies typically carries loan rates of 10% to 14% plus an ownership share. SBIC financing is limited to small businesses; one test under 13 CFR 121.301 is tangible net worth of no more than $24,000,000 and average net income of no more than $8,000,000.
How Does Unitranche Lending Simplify the Stack?
Unitranche lending replaces a senior loan and a subordinated loan with one facility, one set of documents and one blended rate. The borrower negotiates with a single lender or club, which usually shortens the time to close and removes the intercreditor negotiation from the borrower’s side of the table.
Behind the scenes, lenders in a unitranche often split the loan into “first-out” and “last-out” pieces through an agreement among lenders. The borrower pays one rate, but those lenders’ rights differ in a default. Ask how that agreement affects amendments and waivers before you sign.
When Do Companies Use Junior Capital?
Junior capital is used when the deal needs more debt than senior lenders will provide but the owners do not want to sell more equity. Common triggers include an acquisition priced above senior leverage limits, a partner buyout or growth that has outrun the borrowing base.
The 2013 interagency leveraged lending guidance, which the Federal Reserve still posts as SR 13-3, said total leverage above 6x debt to EBITDA raises concerns for most industries. On December 5, 2025, the OCC and FDIC withdrew from that guidance. As of October 3, 2026, the Federal Reserve had not announced a withdrawal.
What Intercreditor Issues Should You Expect?
When senior and mezzanine lenders both lend to the company, an intercreditor or subordination agreement governs their relationship. Key terms include:
- Payment blockage: the senior lender can stop cash payments to the mezzanine lender after a default.
- Lien subordination: any mezzanine lien ranks behind the senior lien.
- Cure and purchase rights: the mezzanine lender may cure senior defaults or buy out the senior loan.
Can ABL Collateral Reduce the Need for Costly Junior Capital?
An asset-based revolver lends against the borrowing base rather than against a multiple of EBITDA, so companies with substantial receivables and inventory can raise more senior-priced debt. According to the OCC’s Comptroller’s Handbook on asset-based lending, common advance rates run 70% to 85% of eligible receivables, and inventory is typically advanced at up to 65% of book value or 80% of net orderly liquidation value. For asset-heavy companies, asset based lending can shrink or replace the mezzanine layer. If a bank has already said no, see our guide how to get a business loan after the bank says no.
Sample Structure: Funding a $15,000,000 Acquisition
The example below is hypothetical. Rates are assumptions for illustration, not quotes. A buyer is acquiring a company with $2,500,000 of EBITDA for $15,000,000, or 6.0x EBITDA, and the target has about $6,000,000 of eligible receivables and inventory.
| Layer | Option A: senior plus mezzanine | Option B: unitranche | Option C: ABL, senior and smaller mezzanine |
|---|---|---|---|
| ABL revolver (assumed 7.5%) | None | None | $4.5M |
| Senior term loan (assumed 8%) | $7.5M | None | $4.5M |
| Unitranche (assumed 10%) | None | $10M | None |
| Mezzanine (assumed 12% cash plus 2% PIK) | $3.75M | None | $2.25M |
| Equity | $3.75M (25%) | $5M (33%) | $3.75M (25%) |
| Total debt to EBITDA | 4.5x | 4.0x | 4.5x |
| Annual cash interest | $1,050,000 | $1,000,000 | $967,500 |
Option B is the simplest to negotiate but needs the most equity. Options A and C use the same equity and leverage, yet Option C cuts annual cash interest by $82,500 and its PIK accrual from $75,000 to $45,000, because the borrowing base supports more of the debt at senior pricing. The best choice also depends on covenants, prepayment flexibility and the owners’ view on warrants.
How Does a Debt Capital Advisor Run the Process?
A debt capital advisory engagement typically follows these steps:
- Build the financial model.
- Design alternative capital structures, like the options above.
- Approach senior, unitranche, mezzanine and asset-based lenders.
- Compare term sheets on all-in cost, covenants, call protection and equity features.
- Negotiate the credit agreements and intercreditor terms through closing.
When a deal combines several layers, Commercial Finance Partners’ structured finance work coordinates the lenders so the documents fit together.
Frequently Asked Questions
Is mezzanine debt more expensive than a unitranche loan?
Yes, on a per-dollar basis. Mezzanine debt is subordinated, so it carries a higher cash coupon, often PIK interest and usually warrants. A unitranche loan blends senior and junior risk into one rate that typically falls between senior and mezzanine pricing. Total cost still depends on how much of each layer the deal needs and on fees and prepayment premiums.
When do companies use junior capital?
Companies use junior capital when a transaction needs more debt than senior lenders will provide and the owners want to limit dilution. Typical cases are acquisitions priced above senior leverage limits, partner buyouts and growth that exceeds the borrowing base. Junior capital ranks behind senior debt, so it costs more but usually requires less ownership than new equity.
Structuring an acquisition or recapitalization? Ask Commercial Finance Partners to model senior, unitranche and mezzanine options for your deal through our contact page or call (561) 948-0769, or start with the Loan Finder.