I’ve worked with early stage and growth companies in the UK, Europe and in emerging markets. Although there are different factors to consider, one thing is the same the world over: securing funding is a critical step in growing a business, and debt financing can provide the capital needed to scale operations, invest in growth, or manage cash flow.
Raising debt for the first time can be overwhelming. Here I have summarised the essential factors to consider when navigating the process and I’d welcome a discussion to expand upon any of these to help you steer your course through the process.
Clarifying Your Funding Needs
Before seeking financing, determine exactly how much capital your business needs and what it will be used for. Whether funding equipment, inventory, or expansion, having a clear financial plan will help you choose the right loan structure and attract lenders best suited to support your growth strategy.
Assessing the Impact on Your Business
Debt financing should strengthen your business rather than strain it. Before borrowing, analyse:
- Cash flow forecasts – Will your startup generate enough revenue to comfortably service the debt?
- Debt-to-equity ratio – Ensure borrowing remains manageable within your financial structure.
Choosing the Right Type of Debt
Different financing options exist, each suited to different business needs:
- Business term loans – give the certainty of fixed loan amounts repaid over time, ideal for growth investments.
- Lines of credit and overdrafts– offer flexible access to funds to cover short-term expenses.
- Venture debt – these are designed for high-growth startups alongside equity investment, venture debt lender will often expect a share of equity upsides.
- Government-backed loans – low-cost financing options offered by government programs may be available for your business. In the UK, these might be through the British Business Bank, Innovate UK or a local enterprise partnership. In emerging markets, development finance institutions, whether multinational, regional or bilateral, may be looking for investment opportunities in a business like yours. Make sure you read my article about what impact investors look for in potential investees.
Selecting the right financing type ensures it aligns with your business goals and cash flow requirements.
Understanding Interest Rates and Costs
The cost of borrowing will vary depending on the lender, your startup’s financial health, and market conditions. Pay attention to:
- Interest rates – Fixed rates provide predictability, while variable rates fluctuate.
- Fees and charges – expect to also pay to the lender origination fees (for setting up the loan), commitment fees (for making the loan available when not drawn), early repayment fees, and reimbursement for administrative costs.
- Other economic returns – some lenders may require a share in the equity growth to compensate for backing your business in this early, more risky phase. Warrants for equity or a top-up payment linked to future value increases may be proposed by lenders.
Ensuring Manageable Repayment Terms
Startups often face unpredictable revenue streams, so structuring loan repayments effectively is crucial. Consider:
- Loan duration – Longer terms may ease short-term financial pressure, but shorter terms reduce overall borrowing costs.
- Repayment structure – it will be important to ensure monthly payments fit within your revenue projections. If your business is seasonal, ask for a sculpted payment profile to fit your cash-flow cycle.
Security and Personal Guarantees
Many lenders will require some form of security, which can include:
- Collateral – Business assets pledged against the loan (e.g., equipment, bank accounts or accounts receivable, and also shares).
- Personal guarantees – Many early-stage founders must personally back loans, increasing individual risk.
Understanding these requirements will help you to assess the level of risk you’re willing to take.
Loan Covenants and Lender Restrictions
Loan agreements will include covenants—conditions that you must comply with, such as maintaining a certain revenue level or financial ratios, or limiting certain operational activities without the consent of the lender (such as further indebtedness, acquisitions and disposals). Smit Advisory can explain and negotiate these to ensure such restrictions do not hamper your day-to-day operations or limit future business growth.
Building Strong Lender Relationships
Establishing a relationship with your lender can be beneficial. Whether working with banks, alternative lenders, or government programs, a strong lender relationship may lead to better terms and future funding opportunities. If your lender understands you and your business, it will allow them to flex their terms to better suit your needs, and to support you if your business experiences bumps in the road.
Conclusion
Raising debt is a strategic decision that requires careful planning. By evaluating these factors with support from Smit Advisory, you can secure financing that supports business growth while minimizing risks. With the right loan structure and lender relationship, raising debt can be a powerful tool to accelerate your startup’s success.
