The benefits of Debt Capital funding for business owners

Whether it’s for funding growth, facilitating operations or to execute key events like a MBO or Merger and Acquisition, debt capital allows business owners to finance without giving away control.

In this blog, we look at the advantages of debt capital and how it can be beneficial for SMEs.

What is Debt Capital?

Debt capital is money that is borrowed by a company and must be repaid, with interest, at a later date. The principal and interest repayment plan are typically specified at the time of the loan. Debt financing can come from a variety of sources, including banks, credit unions, alternative lenders, and online providers.

There are two main types of debt capital: short-term and long-term. Short-term debt financing is typically used to cover operational expenses, such as inventory or payroll. Long-term debt financing is typically used for larger investments, such as growth planning, refinancing or an acquisition.

Debt financing could quickly make people think of borrowing money from a bank via a bank loan. However, banks today are usually not overly eager to assist small to mid-sized UK businesses, depending on the business's risk tolerance and stage of development.

There are, however, a variety of debt financing options available depending on the needs of the company and its capacity to repay the loan.

With a usual duration of 2-5 years, debt financing is frequently of a long-term nature.

Why do businesses use Debt Financing?

A company looks for debt financing because it needs a significant amount of capital to operate or grow.

Many businesses use both debt and equity financing, but if they develop a track record of success that can be documented in financial statements, debt financing becomes far more practical and is frequently the preferred option.

For businesses that are expanding, it is possibly better to consider loan financing rather than equity funding. Growing and ambitious enterprises often need more money and are better suited to reduced borrowing costs.

Benefits of Debt Capital

There are several benefits of taking on debt capital.

Flexibility

Long-term debt financing loans can be very beneficial if given additional flexibility, such as the option to set interest-only periods and capital bullet payments to improve cash flow.

Tax Deductibility of Interest Payments

Debt financing interest payments are considered a cost and are tax deductible. This one feature of debt financing contributes to the fact that it is a more alluring method of financing than the usage of equity. The amount of interest payments, for instance, shields that amount of revenue if your business' marginal tax rate is 19%. This can save a company money, which can be used to invest in other areas or cover operational expenses.

To do so, you may need to:

Speak with an accountant: The first step is to speak with an accountant or tax advisor to see if you’re eligible for this benefit. They will be able to help you navigate the tax code and maximise your deductions.
Keep track of interest payments: Once you know that you’re eligible for this benefit, it’s important to keep track of your interest payments. This information will be needed when you file your taxes.
Claim the deduction: When you file your taxes, you will need to claim the deduction for the interest payments you made during the year. Be sure to keep all documentation in case you’re audited.

Maintain Control

When you borrow money from a debt lender, you become responsible for making the agreed-upon payments on time and fulfilling the terms and covenants of the loan, but that is the extent of your responsibility. You are still free to manage your company however you see fit, free from outside pressure from private investors.

Maintain profits

There is no profit sharing if the company uses debt financing because there are no investors. Companies are not required to share profits which can be retained by the business owners and distributed as needed.

Lower borrowing costs

Generally speaking, equity financing is more expensive than debt financing. Because interest payments are tax deductible, the interest rate you receive when using debt financing will be lower than the cost of equity.

Simple to budget for

When you choose debt financing for your company, you will be able to budget for your repayments well in advance. That means you'll be able to comfortably plan for the principal and the interest that needs to be repaid on a periodic basis.

The consistency of this expense might be a big advantage if you need to develop financial strategies for your company to open new opportunities.

What to consider when Debt Financing

Security and Collateral

In order to obtain the appropriate financing, certain lenders may want your firm to offer security through methods like debentures to secure against collateral such as the company's assets. That implies that if something happens that forces you to default on your loan, your company's assets could be at risk.

Some lenders may also ask you, other owners, or stakeholders to personally guarantee the loan, thus you may be compelled to put your own assets at risk in order to get the financing you need for your organisation.

Financial sensitivity and preparedness

Debt financing often requires a certain amount of financial preparedness and time commitment from the business owners to determine whether their business satisfies the necessary eligibility conditions.

In order to make sure that the risk levels are within an acceptable limit, lenders often expect thorough, precise, and current financial reporting and forecasting, in addition to an understanding of the dynamics of your organisation and its plan.

SME Capital Debt Financing

At SME Capital we do not as for personal guarantees or collateral.

We provide specialised, long-term financial alternatives rather than a general loan that applies to all businesses in the UK.

We are here because we firmly believe that our specifically designed finance solutions for UK companies, which will aid in your growth and success, represent a better option. We are experts in SME lending, therefore every customised loan we make for you will be designed especially with the goal of becoming your long-term finance partner.

Whether you need financing for a refinance, succession planning, M&A, or growth and expansion, we give you the opportunity to thrive without asking you to give up control, equity, or personal assets.

SME Capital uses a cash flow-based approach to lending, offering a multiple of business profitability, specifically EBITDA, as opposed to a loan amount being directly tied to the value of specific assets. We can provide an economic solution to consolidate smaller lenders, or refinance expensive short-term loans, while providing additional working capital for the business.

With repayment terms from 3 to 7 years and flexibility on repayment structures SME Capital is an effective, relationship-led, refinance solution for qualifying businesses in any sector that have been trading more than 3 years with £250,000+ EBITDA.

About SME Capital

SME Capital was founded to support the growing number of SMEs who face difficulty or frustration in accessing capital through traditional methods. We understand the importance of real and trusted relationships in the SME lending market and have dedicated Regional Directors based across the UK. By combining traditional lending expertise with the latest in data analytics, we are supporting established UK SMEs with their long-term objectives and business ambitions

Benefits of Debt Capital funding for business owners