Considering Debt? A Guide for Businesses

Introduction

For a business, debt is a tool that can be both a boon, and if used recklessly can be a burden. Understanding why and when a company needs debt, the criteria lenders evaluate before providing it, and how borrower’s can secure favourable terms are essential components of financial strategy. This debt management guide blog dives into the details and explains how a debt advice in UK by debt advisor can assist you in making the best choice when you’re thinking about getting a loan for your business.

Why Companies Need Debt

Debt management plan scan serve as a crucial financial instrument for companies aiming to fuel growth, undertake strategic initiatives, or navigate temporary cash flow challenges. By leveraging debt, organisations can access funds without diluting ownership or relinquishing control. Whether it’s expanding operations, investing in new technologies, or managing day-to-day working capital, debt provides companies with the necessary financial flexibility to achieve their objectives.

Based on your needs, there are several types of debts you can issue:

Invoice Finance: A financing method where a business sells its accounts receivable (invoices) to a third party at a discount. This provides the business with immediate cash flow rather than waiting for customers to pay their invoices.

Asset Finance: A type of financing that allows businesses to acquire or use assets (such as equipment, machinery, or vehicles) without having to purchase them outright. The assets serve as collateral for the loan, and the business pays in instalments over time.

Working Capital: The capital used by a company for its day-to-day trading operations, calculated as the difference between a company’s current assets and current liabilities. It represents the funds available for covering short-term operational expenses.

Term Loan: A loan with a fixed repayment and maturity repaid in regular instalments over a defined period.

Mortgage Debt: Debt secured by real estate, where the property itself serves as collateral for the loan. Mortgage debt is common in real estate financing, such as home mortgages or commercial property loans.

Convertible Debt: Debt that can be converted into equity (usually common stock) later at a predetermined conversion rate. Convertible debt provides the lender with the option to convert their debt investment into ownership shares.

Considering the company’s current situation, debt types such as debentures, commercial paper, mezzanine debt, etc., could also be viable choices.

When to Consider Taking Debt

Taking onmanage debt should be a strategic decision aligned with the company’s goals. Debt can be beneficial when:

Investing in Growth: Funding expansion initiatives, marketing, launching new products, or entering new markets are situations where debt can be a strategic enabler.

Managing Working Capital: Short-term cash flow gaps or seasonal fluctuations may warrant a temporary injection of funds through debt.

Capital Expenditures: Funding for capital projects and assets, such as infrastructure improvements, buying machinery or vehicles, may be more efficiently sourced through debt.

Criteria Lenders Look at Before Providing Debt

Lenders assess several key criteria before extending debt to a company:

Creditworthiness: Lenders evaluate a company’s credit history, assessing its ability to meet financial obligations. Strong creditworthiness increases the likelihood of securing favourable loan terms.

Financial Strength: Lenders analyse financial ratios such as debt-to-equity ratio, current ratio, and interest coverage ratio to gauge a company’s financial health and risk profile.

Existing Debt: Lenders seek information on any current debts within a company, aiming to understand the terms, purpose, and duration of these obligations. This detailed insight helps lenders assess potential risks more comprehensively.

Cash Flow: Positive and stable cash flow is a critical factor for lenders. It ensures that a company can meet its debt obligations promptly.

Collateral: Lenders often require collateral as security for the debt. The type and value of collateral play a significant role in determining the loan amount and interest rates. Lenders also look if the individuals can give a Personal Guarantee, which helps in strengthening borrower’s case by adding additional security to the loan.

Projections and Future Business Plans: A comprehensive business plan with realistic financial projections demonstrates a company’s understanding of its market, growth potential, and ability to repay the debt.

Forecasts play a pivotal role in the debt acquisition process. Lenders scrutinise financial forecasts to assess a company’s ability to repay debt. Accurate forecasts instil confidence in lenders, showcasing the borrower’s strategic planning and financial acumen.

Getting the best offers – Fulfilling Lender Criteria

Borrower’s can secure lower interest rates by:

Demonstrating Stable Cash Flow: Consistent, positive cash flow assures lenders that the company can meet its financial obligations, reducing perceived risk.

Negotiating with Multiple Lenders: Obtaining quotes from different lenders allows companies to compare terms and negotiate for more favourable rates.

Having a strong future business plan: The prospective financial forecasts of a company significantly influence its ability to secure advantageous debt terms. A well-defined and robust future business plan serves as compelling evidence, showcasing the company’s capacity to manage the proposed debt comfortably.

Maintaining a Strong Credit Profile: A positive credit history can result in lower interest rates.

Providing Adequate Collateral: Offering valuable collateral can mitigate the lender’s risk, leading to more favourable terms.

The Role of Debt Advisory Services

Debt advisory services UKprovide invaluable assistance to companies seeking debtand money. These professionals specialise in navigating the complex landscape of financial markets, helping companies identify suitable lenders, structure deals, and negotiate terms. Engaging with a debt advisory service might enhance a company’s chances of securing favourable debt terms, optimising its capital structure, and ensuring alignment with long-term financial goals.

Conclusion

Debt, when used wisely, can be a powerful tool for companies to achieve their long- and short-term objectives. By understanding the criteria lenders evaluate, optimising financial health, and leveraging debt advisory services, companies can navigate the borrowing landscape with confidence. Careful consideration of when to take on debt, coupled with accurate financial forecasts, ensures that companies not only secure the funds they need but also set themselves up for long-term financial stability and growth.

Talk to the Experts

Do you have questions about raising and managingdebt for your company? Our debt advisory team is ready to assist youwith our debt management plan. We work proactively to understand your needs, prepare a strong case and secure competitive offers tailored to your situation. Please get in touch with us by filling the form below for financial and debt advisory service!

About the author

Shivam Bhanushali
Shivam Bhanushali is a Financial Analyst within the Corporate Advisory Team at dns Accountants. Bringing expertise in capital and transaction advisory, he collaborates with clients to achieve their financial goals. Shivam holds a MSc degree in Business & Finance from Warwick Business School, and an undergraduate degree from NMIMS Mumbai.