Debt finance

What is debt finance?

Debt finance is when a business borrows money – this could be in the form of a loan, or an overdraft – and agrees to pay it back, with interest, over a period of time.

What are the advantages to debt finance?

  • Debt finance provides a straightforward and simple way for businesses to access finance.
  • Unlike equity investors, debt finance providers don’t have a say in the running of the business taking on the debt. They only get involved if payments are not made on time or if there is a breach of the finance terms and conditions.
  • Once the debt is repaid, agreements with the finance provider are complete – the businesses’ liability is over.
  • Interest on debt finance is tax deductible.

What are the disadvantages of debt finance?

  • Many debt finance providers require assets of the business, or a personal guarantee from the director, as a form of security if payments can’t be made. If a business is unable to keep up with repayments, the lender can seize the asset they have security over.
  • It’s always important to read the terms and conditions of any finance agreement in detail to ensure they can be met. There may be additional fees or a variable interest rate to consider.

  • Ease of access to debt finance can be an issue for some SMEs, particularly in a competitive market where there are lots of lenders to choose from. Too much debt can impact a business’ profitability and valuation.

Types of debt finance

  • Bank loans / overdrafts
  • Family and friends
  • Leasing (borrowing to buy specific equipment or machinery)
  • Invoice discounting (borrow against sales)
  • Peer-to-peer (e.g. crowdfunding)

Who provides debt finance?

  • High street banks
    They often provide favorable interest rates.
  • New, online challenger banks
    Approval and funding can be awarded in as little as 24hrs.
  • Peer-to-peer lenders
    Peer-to-peer (P2P) platforms match investors with businesses that are looking to borrow funds.
  • Specialist debt/loan providers
    Community development finance institutions provide a more personal approach compared to high street lenders, by understanding the individual needs and requirements of each business.

Find debt finance providers in the North East