Debt Funding is a critical and often misunderstood funding need. For many SMEs and Property Developers it is the primary catalyst that enables growth and business expansion. In the UK there are several sources of debt funding, from traditional banks through to specialist debt funding.
For business owners looking to understand how debt finance can support their plans it is important to find and form a relationship with the right funder. The information on this page provides an outline and guidance on the debt funding market.
What is Debt Funding?
With many businesses eager to pursue growth, explore new markets and increase exports, the ability to navigate the complex funding landscape is essential in making these ambitions a reality. With a growing market of alternative finance options offering a vast array of capital sources alongside traditional bank lending, it can be increasingly difficult to grasp which funding is right for a particular business and understand the financial jargon that comes with it.
Debt funding is one of 3 distilled finance categories: debt funding, equity, and mezzanine (meaning an alternative mix of both).
Debt Funding (also referred to as debt financing or debt lending) is a way for a business to raise capital through means of borrowing.
This funding will need to be repaid at an arranged later date, usually through regular repayments with added interest.
Examples of debt funding include peer-to-peer lending, business loans, asset financing and invoice financing. This type of investment is suitable for businesses that do not want to give up ownership shares and decision rights. It is a popular way of getting the cash injection needed for a business to pursue growth plans without losing control.
Equity raises capital by selling shares of the business. There is no obligation to make regular repayments like debt funding, however a percentage of the business will belong to another party and the level of business control and decision making an owner has may be affected.
Mezzanine finance (also referred to as a hybrid) combine elements of debt and equity to form an agile alternative to its counterparts, using equity as a form of business collateral often allowing for higher levels of capital received compared to solely debt lending.
Advantages of Debt Funding
Owners keep business control
A major advantage of securing debt funding is that you do not need to give up stakes in the business in order to receive capital. Unlike equity finance, decision making and business control remains undiluted, giving the comfort that the current management team is still 100% in control.
Flexible repayment plans
With repayments and interest set out in advance, a business can monitor cashflows and plan for future growth. You will know how much is needed to be paid back each month thereby supporting better budgeting and planning.
Long-term debt can be used for a multitude of business purposes from MBOs, to shareholder transaction, from property developments to growth capital. Every business strategy is different and finding the right type of funding and right partner is essential to fulfilling business growth plans.
Options to suit every business strategy.
Funding deals beyond the traditional lender.
How Debt Funding works
Debt in essence is an exchange between a business (borrower) and a lending partner. The lender will release a capital sum to a business under the condition a business meets certain criteria and terms are agreed.
Terms will include a repayment schedule, whether that means paying the whole amount back in full at a later date (bullet repayments) or through multiple smaller amounts over a set period. They will also include the amount of interest that is expected to be repaid on top of the capital borrowed, and any penalties for late repayments.
Once debt funding has been agreed between a funder and a client, the business is immediately able to use the additional liquidity to support the business plans they discussed with the funder.
Debt Funding in action
Debt funding for business organisations can be used to support a number of different commercial situations ranging from cash flow support, property development, tooling, and digital transformation through to traditional business restructuring situations such as a buyout (MBO, MBI) or shareholder restructure.
In the UK the private debt market has grown significantly over the past decade from infancy to an established and competitive asset class in its own right; this has been in response to tighter bank lending conditions and a low interest rate environment for investors.
The number of debt funds has risen substantially with those supporting ‘direct lending’ attracting more funding than any of the other categories (e.g. distressed debt, mezzanine, special situations, venture debt).
It is significant however that not all parts of the SME landscape are served equally. There are well over 30,000 SMEs in the UK in the lower mid-market that experience more difficulty in obtaining active and risk adjusted debt funding support.
Frontier Development Capital is at the forefront of debt funding with experience of supporting over 50 businesses to date, across a wide range of industry sectors and transaction types. Our focus is upon working with business owners looking for a supportive and experienced debt funding partner.
At FDC we believe in working only with those business owners that want a professional business relationship and funding that makes sense for their business. Our investment team can only make the right investment decisions if there is a relationship between both parties; and indeed, the relationship can continue throughout the term of the loan.
With current funds under management valued at c.£1billion and experience of debt funding across various buyout, growth capital, real estate and capital programmes, Frontier has the appetite to support underserved lower mid-market SMEs looking for between £1m and £10m in debt funding support.
The investment team is able to advise upon funding structures for a variety of transaction requirements, with SME Funding and Property Finance the areas of greatest need. To find out more about how the FDC team operates talk to one of the investment directors.
How much does debt funding cost?
The rate of interest is relative to the risk level of the investment. Businesses should seek out a market rate appropriate for the risk taken by the investor.
Do you need to have assets to secure against the loan?
No, there are a wide array of unsecured debt funding options available, sometimes known as junior debt or subordinate debt.
Can debt funding be used to finance shareholder cash out transactions or MBIs?
The flexibility of debt funding means that most transactions, including shareholder transactions will be considered.
Are repayment holidays allowed as part of a loan structure?
Every debt funder is different, but many will offer flexible or “bullet” type repayment options, where the capital is paid off at the end of the loan.