when securing mezzanine financing owners may sacrifice some control and upside potential due to the loss of equity lenders may have a long term perspective and may insist on a board presence owners also pay more in interest the longer the mezzanine financing is in place loan agreements will also often include restrictive covenants limiting the ability to borrow additional funds or refinance senior debt as well as establishing financial ratios that the borrower must meet restrictions on payouts to key employees and even owners are also not uncommon 
mezzanine lenders are at risk of losing their investment in the event of the bankruptcy of the borrowing company in other words when a company goes out of business the senior debt holders get paid first by liquidating the company s assets if there are no assets remaining after the senior debt gets paid off mezzanine lenders lose out finally mezzanine loan debt and equity can be tedious and burdensome to negotiate and put into place most such deals will take three to six months to finalize long term patient debtcheaper than raising equitystructural flexibilityno dilutive effect on company s equitylenders tend to be long termhigh interest ratesdebt is subordinatedcan be hard and slow to arrangemay include restrictions on further creditowner must relinquish some controlexample of mezzanine financingin a mezzanine financing example bank xyz provides company abc a maker of surgical devices with 15 million in a mezzanine loan financing the funding replaced a higher interest 10 million credit line with more favorable terms company abc gained more working capital to help bring additional products to the market and paid off a higher interest debt bank xyz will collect 10 a year in interest payments and will be able to convert the debt to an equity stake if the company defaults bank xyz was also able to prohibit company abc s borrowing of additional funds and to impose certain financial ratio standards upon it in a preferred equity example company 123 issues series b 10 preferred stock with a par value of 25 and liquidation value of 500 the stock will pay periodic dividends when funds are available until the defined maturity is reached the relatively high liquidation value is a takeover defense making it unprofitable to acquire the stock for such purposes in general mezzanine loan financing and preferred equity are useful in various situations among these are 