For high-growth, founder-led businesses, a financing round isn’t just how much you raise – it’s how you structure it. Here is how using mezzanine debt, preference shares, and project finance alongside traditional equity and senior debt can help you bridge gaps, reduce dilution, and fund growth on your terms.
The Optimisation Problem
You’ve built a revenue-generating business. You’re profitable, or you have a strong asset base. When you look at your next phase, be it for major fleet capex, a strategic acquisition, providing some shareholder liquidity or managing your working capital due to “growing pains”– you already know the traditional toolkit.
Equity from founders, angels, or venture capital investors provides the risk capital and strategic support. Senior debt from a bank or alternative lender provides the low-cost, secured foundation. For most founders, these are the bedrock of any funding round.
We are increasingly seeing the value-conscious founders ask a different question. It’s not “Equity or Debt?”, but rather “As part of arranging my equity and debt, how do I fill the gaps between them without giving away more than I need to?”
This article explores how to use mezzanine debt, preference shares, and asset-level project finance to complement – not replace – your core equity and senior debt. The aim is to maximise total firepower while minimising dilution and maintaining control.
The Strategic Middle Layer
Think of your funding as a “capital stack.” At the base is your equity (the most expensive, but the most flexible). Above that sits senior, secured bank debt (the cheapest, but the most restrictive).
Between them, there is a strategic layer. This middle layer, which made up a significant portion of the £21.2 billion UK leveraged loan market in 2025. It’s not a replacement for your bank facility; it’s a complement that allows you to do more with that facility.
Two instruments are particularly effective in this complementary role:
- Mezzanine Debt
Often structured as a loan with cash interest and amortising or bullet repayments, depending on use of funds. Cost of funds are generally 10-14% and facilities rank subordinate (i.e. sits behind) to the senior bank (meaning the bank gets paid first), while often being unsecured, but ahead of your equity.
It fills the gap when the bank’s loan-to-value ratio or EBITDA multiple will not cover the full funding amount. However, there can be a form of small “equity participation”, such as warrants, where they share part of the future upside.
- Preference Facility
A hybrid instrument where an investor provides capital in exchange for fixed interest or dividend, which can be paid in cash or “paid in kind” (i.e. capitalised to the principal). Rank subordinated to senior and mezzanine debt. Cost of funds can be 10-12%, however as the Preference provider is taking closer to “equity-like” risk, they will generally seek some equity-like upside in their final return through an equity kicker, warrants or similar.
As a result, the effective cost of funds will be greater, but still less than further equity dilution. If you are a UK company raising funds through the Enterprise Investment Scheme (EIS), it’s important to know that only ordinary shares and not Preference shares, can be issued, in order to be qualifying for the tax break.
Building on a Senior Debt Foundation: Asset-Level Project Finance
For founder-managed businesses with strong tangible asset backing and contracted cashflows – energy infrastructure, long-term service concessions, property or leasing fleets – project finance can increase capacity without loading the operating company with all the risk. The UK market is mature here – SPV-style ring-fencing is standard in larger projects, however we regularly see lenders seeking to support projects, backed by the security of cashflows.
This is why an SPV structure can be attractive for founder-managed businesses with “project-like” economics: the lender underwrites the asset or project, and the operating group protects its core trading capacity. For a founder, this means your existing senior lending bank remains your cornerstone. The alternative layer simply allows you to do more within that relationship.
Applying this to the real world
For a founder-led firm considering equity and debt for funding, there are a number of scenarios where adding a complementary layer of funding unlocks more value:
- Capex Heavy Deployment (e.g. Leasing Fleets or Equipment)
The challenge for a company is to fund as much of the upfront investment as possible, while retaining working capital flexibility. Consider an asset financing facility, combined with existing cash and a senior revolving facility for working capital, with some mezzanine or equity to fund the gap.
- Funding Acquisitions
The challenge is to fund a large proportion of consideration with senior debt, but this will not necessarily cover all consideration or lend against earnings uplift from expected synergies. In lieu of further debt, new equity and/or vendor loan, a preference facility could provide additional funding while tempering equity dilution.
- Shareholder Liquidity (The “Secondary”)
It can be a challenge even for a profitable and cash generative company to buy out an early shareholder. To navigate any capital constraints, a company can issue a Preference share, with the proceeds used to buy out the departing shareholder, leaving bank facilities undrawn and no further dilution from new equity.
- Working Capital Mismatches
For a Company is suffering from “growing pains” (i.e. growing faster than existing cash and revolving credit facilities allow), the Company can pursue an asset-based option (Asset-based lending (ABL) facility) or cashflow based option (financing of future receivables). Utilising tangible assets or forward-selling a portion of receivables from a quality customer provides additional headroom, without further equity dilution.
Why structuring all funding concurrently matters
A blended funding round is more likely to work if the pieces fit together. A process run in parallel matters helps align key overlapping issues:
- Security and priority: who is secured on what, and the “payment waterfall” of who gets paid first;
- Covenants and headroom: how much flexibility you retain as a Company if growth is slower than planned;
- Intercreditor terms: what needs consent for acquisitions, disposals, dividends or refinancing; and
- Tax and regulatory constraints: EIS qualification, stamp duty, interest deductibility, among others.
How HMT LLP Can Help
As an independent corporate finance adviser, HMT LLP sits on your side of the table. We are not a lender, and we don’t sell products. Our role is to help Founder-led businesses like yours design and execute the optimal capital stack.
Our firm has over 33 years of advisory experience across M&A, Fundraising Advisory and Due Diligence, advising on over 675 deals, including 34 in the last 12 months. We work closely with Founders to help them achieve their growth ambitions.
We run competitive funding processes, where investors and lenders need to put their best foot forward, so that you achieve the best outcome.
Our goal is to ensure that when you raise your next round, you do so with a structure that funds your growth ambitions today while preserving your value for tomorrow.
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