The capital stack is just an ordering. It answers one question, who gets paid first if there isn’t enough money, and every other feature of each layer follows from the answer. Price, covenants, security, patience, and speed all track position in that queue.

Here’s the whole thing, top to bottom.

Senior debt

Position: first in line. Security: first-priority lien on some or all assets. Cost: the lowest in the stack.

Senior debt is the cheapest capital because it carries the least risk of loss. It comes in two broad flavors:

  • Cash-flow senior, sized as a multiple of EBITDA, typically with maintenance covenants. Most comfortable in the 3.0–4.0x range for middle-market credits, though appetite moves with the cycle.
  • Asset-based (ABL), sized by a formula against collateral rather than earnings, with advance rates against eligible receivables and inventory. An ABL will often lend where a cash-flow lender won’t, because it’s underwriting assets rather than projections.

The tradeoff for cheap money is control: tighter covenants, more reporting, and first claim on your collateral.

Mezzanine debt

Position: behind senior, ahead of equity. Security: subordinated, often unsecured or on a second lien. Cost: substantially higher than senior, frequently with a payment-in-kind component and sometimes warrants.

Mezzanine fills the gap between what senior will lend and what the sponsor or owner wants to put in as equity. It’s patient capital with limited amortization, which makes it useful in acquisitions where cash flow needs to service the senior facility first.

The practical constraint is size. Most mezzanine funds have minimum check sizes well above what a lower-middle-market company needs, which is why sub-$2M subordinated needs end up somewhere else entirely.

Unitranche

Position: a single facility that blends senior and subordinated risk. Security: first lien on everything. Cost: between senior and mezzanine, a blended rate.

Unitranche exists to solve a speed and complexity problem. Instead of negotiating a senior facility and a mezzanine facility with two lenders and an intercreditor agreement between them, the borrower signs one document with one lender.

Behind the scenes, the lender may split the economics with a participant through an agreement among lenders (AAL), which allocates first-out and last-out positions. That negotiation happens on the lender’s side, and the borrower generally doesn’t participate in it, which is precisely the point. One facility, one set of covenants, one closing.

Unitranche typically prices above pure senior and below a true senior-plus-mezzanine blend, and it closes faster than a two-lender structure. For a middle-market acquisition on a timeline, that speed is often worth more than the rate difference.

Equity

Position: last. Security: none. Cost: the highest, because it’s the residual claim, equity gets whatever remains after every other layer is satisfied, which in a bad outcome is nothing.

Everything above equity is an attempt to fund the business without giving away that residual.

The rule that explains the pricing

Each step down the stack accepts more risk of loss and charges for it. That’s the whole logic. When someone tells you a subordinated layer is “expensive,” what they mean is that it sits behind a first lien and would be wiped out before the senior lender takes a dollar of loss.

This is also why the cheapest capital is rarely the most available. Senior lenders are cheap because they’re selective. The further down the stack you go, the more flexible the capital and the more it costs.

Intercreditor agreements: the document borrowers never read

When more than one lender is involved, an intercreditor agreement governs their relationship, payment priority, standstill periods (how long the junior lender must wait before acting on a default), lien subordination, and who controls enforcement.

Borrowers usually treat this as the lenders’ business, and mostly it is. But two provisions matter to you directly: whether the junior lender can accelerate independently, and whether the senior lender can block payments to the junior in a stress scenario. Both determine how much room you actually have when something goes wrong.

Negotiating an intercreditor takes time, commonly weeks. On a deal with a hard closing date, that timeline is frequently the reason a unitranche or a bridge wins over a cheaper two-lender structure.

Where the stack meets reality

Two things reshape this diagram in practice:

Coverage constrains everything. How much total debt a business can carry isn’t decided by appetite at each layer, it’s decided by whether the combined debt service is coverable. Model the whole stack against your coverage ratios before assuming the layers stack cleanly.

Time is a real dimension. The stack as drawn says nothing about how long each layer takes to close, and that gap is where most middle-market deals actually get decided. A cheaper structure that funds in ten weeks is worthless against a closing in three, which is why speed-tiering the stack is often the more useful map.

The short version

Senior is cheap, selective, and secured first. Mezzanine is patient, expensive, and sits behind. Unitranche buys simplicity and speed with a blended rate. Equity absorbs whatever’s left. Where you belong depends on your collateral, your coverage, and your calendar, usually in that order.

Run your own file first

Not sure which layer your business realistically supports? Run the assessment or send us your financials and we’ll show you the read.

Educational only. Nothing here is an offer of credit, a commitment to lend, or advice on any specific transaction.