Subordinated Debt financing, sometimes called Mezzanine Financing, is capital that sits midway between senior debt and equity and has features of both kinds of financing. There are dramatically fewer sources of Subordinated Debt than there are of senior debt or equity, so it is often considered to be specialty financing.

Subordinated Debt is substantially more risky than Senior Debt since it is generally subordinate to Senior Debt in terms of collateral rights and rights to cash flow. As a result, Sub Debt is rather expensive financing. Such lenders/Investors require an equity kicker, generally in the form of warrants, to boost their return above what they earn from interest income. Subordinated debt financing is generally made available directly from insurance companies, subordinated debt funds, or finance companies. Alternatively, it is raised with public offerings of high-yield ("junk") bonds to insurance companies, pension funds, and other institutional investors. In many companies, subordinated debt is given back to the seller, comprising a portion of the purchase price. States or other public entities may be a source for such financing, usually on much better terms than market sources. The term of such financing is typically six to ten years, and principal payments are commonly deferred until after the senior debt is retired.

These funds are loaned based on the amount and predictability of cash flow exceeding that required to service senior debt. Interest costs can be anywhere from two to eight percentage points greater than rates on senior debt. Because subordinated debt usually has little collateral protection, the lending institution may be granted stock options to own equity in an amount equal to 1% to 10% of the outstanding stock.