Debt Financing

“Debt” is often seen as a negative thing. But what if we told you that debt can be an important way to get the funding your business needs? Debt financing is a simple, effective, and common option that companies choose. It can cover various forms of commercial finance products. And that means you can increase your chances of finding the bespoke option that’s right for you.

What is debt financing?

The first thing to be clear about is that debt isn’t always a bad thing. Yes, debt financing meansthat you’re borrowing money from someone. And, yes, that means it has to be paid back. But a corporate debt financing option is a tried and trusted way to get the funding you’re looking for.

At Nucleus, we know that SMEs need support from time to time. It could be to cover short-term cash flow issues, or there’s a long-term growth vision that needs funding. Either way, turning to external finance providers isn’t unusual. The British Business Bank reveals that 45% of UK SMEs did this at some point in 2020. And debt financing is one of the most common routes taken.

Debt financing services include products as diverse as business loans and invoice financing. You raise the capital you need in the form of borrowing. Once you use that funding for whatever you needed it for, you then need to pay it back. This is typically done by making regular repayments – often each month. Interest is also charged on top of the original amount.

In the past, only traditional high street banks were able to help. But now there are alternative debt financing providers that can deliver a tailored solution to your cash concerns.

What can I use debt financing for?

A business can have several reasons for using debt financing. So, no matter which option you apply for, you can put it to use as you see fit. Here are some common reasons you might need to consider debt financing:

Growth and expansion

If you have your heart set on growing your business, debt financing can drive you forward. It’s one way you can get the chance to pursue new opportunities. You can develop new products, move to new offices, or double your footprint. You can even take on financing through debt to fund an acquisition or management buy-out.

Working capital

From time to time, cash can become tight in the course of running a business. It’s an issue that isn’t helped by things like late invoice payments either. Debt financing is an effective short-term solution to guide you through. It can mean you’re still able to pay suppliers, replace stock, and manage payroll – particularly if you’re a seasonal business.

Unexpected bills

Sometimes, things happen when we least expect them. For all your careful financial planning, all it takes is a bill you hadn’t anticipated to throw things off track. Heating failure, broken windows, or vehicle repairs are some examples of things that you might need to spend money on. And a debt financing solution can be the quickest and easiest way of covering it.  

New staff and equipment

Part of your growth ambitions could include taking on new staff and equipment. Or maybe your existing equipment is in dire need of an upgrade? A debt financing model can help you invest in these areas without having to wait for months to save up your profits.

No matter your funding needs, talk to us today and see how we can help. Our in-house team of experts are on hand to offer the advice and support you need.

How does debt financing work?

To get debt financing, you must first find a lender that is willing to provide you with the funding you want/need. It’s then a case of agreeing to the terms under which you’ll receive that capital. Those terms will include the length of time you have to pay back what you’ve borrowed, as well as the interest that’ll be charged on top.

It’s worth bearing in mind that lenders will usually ask you to provide some security against the amount you borrow. This can include your home, a vehicle, or another business asset.

Once the agreement is completed, funding is made available for you to use as you see fit. Some debt financing models also give you the chance to ‘top-up’ the amount you borrow.

Let’s take our Business Growth Loan as an example of how debt financing works in practice:

−       You need to borrow an amount worth at least £3,000

−       We’ll get in touch with you and confirm your eligibility

−       You send us the documents we need to make an offer

−       If accepted, we’ll send you the funds on the same day

−       You’ll repay what you borrow over the next 12 months

Once you make two-thirds of your monthly payments and everything is going well, you could be eligible to access extra funding from Nucleus. Still not sure how it works? No worries! Just get in touch with a member of our expert team and we’ll be happy to help.

What are my debt financing options?

Loans

One of the most accessible forms of debt financing. With a loan, you borrow what you need and pay back what you owe – plus interest. You can obtain one from a range of sources too. It’s not just high street banks that offer loans. Alternative debt financing providers can also be there to help businesses like yours. Other options include peer-to-peer or government-backed loans.

Asset-based lending

As the name suggests, asset-based lending is secured against a specific business asset. With an equipment finance solution, for example, the funding is secured against the asset you’re buying. This means you won’t own it yourself until the debt is repaid. Invoice finance is another option. You can “sell” outstanding invoices in exchange for a share of the value tied up in them.

Credit cards

For smaller amounts over a shorter period, credit cards provide quick debt financing solutions. When you make payments online or in person, the amount is debited from the card. You then pay back your card provider as soon as you can. If you pay the amount back relatively quickly, you could even avoid paying interest on what you borrow.

Credit facilities

Credit facilities are similar to loans and credit cards. It’s a static pot of funding that you’re free to use as and when it’s needed. It’s important to stick to the terms of your agreement, though. Otherwise, the lender may withdraw the facility and your access to that funding.

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Where can I obtain debt financing?

As mentioned above, traditional high street banks aren’t the only companies that can provide your business with debt financing. The market has grown in recent years to include a wide range of alternative providers – like us! And we believe that focusing exclusively on business finance is the best way to understand your unique needs.

Other providers include peer-to-peer lenders, government agencies, and even friends/family.

Is debt financing right for me?

The characteristics of debt financing mean that you have to be totally sure it’s the right choice for your business. In the first instance, you must be at ease with the idea of taking on debt in exchange for the funding you need.

In practical terms, however, one sure-fire way to know if it’s the right option for you is if you’ll be able to keep to the terms of your agreement. Are you confident that you can make all your monthly payments on time? Do you have assets that you can offer as security?

For some lenders, you might also need to have a good business credit rating.

At Nucleus, we’ll set you straight about the ins and outs of our debt financing options. We take the time to get to know you and your business. Get in touch for a consultation today. Our team will help you figure out if debt financing is the right choice for you.

How can I apply for debt financing?

Now, all you need to do to apply for debt financing is to fill out a simple online form. You’ll likely have a few other steps to complete – but these are normally quite straightforward.

With Nucleus, you can start by applying now. Or you can get in touch with our team to discuss our various products and what you’ll need to provide to get the funding you want.

Debt financing: Am I eligible?

You’ll find that most (if not all) lenders and funding providers will have their own criteria that you’ll need to meet. It can include things like the age of your business, registration status, or the value of your assets. Your credit rating can also sometimes be a factor.

At Nucleus, our mission is to help as many UK businesses as we can. We’ve already provided more than £2 billion in funding to a wide range of companies. Is yours next? For all our products, you must be registered in England and Wales. Certain products also have specific criteria.

Take a look at our various types of funding for more details about eligibility criteria.

Debt financing FAQs

What are the advantages of using debt financing?

One of the biggest advantages of using debt financing is that you remain in complete control of your business. Unlike equity financing, there’s no need to hand over a share of your business to an investor. So, you get the funding you need and still have complete decision-making control.

You can also plan with greater certainty. After all, you’ll know how much capital is coming into your business and you’ll know what your repayment terms are, so you can budget for them. In some cases, longer-term debt financing can be much more cost-effective. It can support a wide range of growth opportunities too. Meanwhile, one other advantage of debt financing is that your interest payments can be tax-deductible.

What are the disadvantages of debt financing?

Like all forms of commercial finance, there can be some disadvantages of debt financing to be aware of. The main one is the need for a steady stream of income to keep up with all your repayments. If you fall behind, you could be charged extra – or the lender can seize any assets secured against the amount owed.

Late or missed payments can also affect your business credit score. This can make it harder to obtain finance in the future, which can lead to problems or missed opportunities down the line.

Are there any lasting effects of debt financing?

The effects of debt financing can be seen in your business credit rating. It’s thought that three in five SMEs have never checked their commercial rating. But taking on debt to fund the next stage of your business journey can have a significant impact – positive and negative.

If used sensibly, debt financing can help you build your credit score. Making regular repayments and sticking to the terms of your agreement shows that you can use debt financing responsibly.

But, if you don’t stick to the terms and fail to make payments on time, it’s likely to harm your credit score. And that can be bad news if you want to secure external funding in the future.

How much can I borrow?

You can often find a solution that fits your needs. At Nucleus, we can provide tailored business solutions starting from £3,000 with our Business Cash Advance. The amount you can borrow is based on your sector and the type of product you apply for. With our Construction Finance, for example, you could borrow as much as £50 million.

Debt financing vs. equity financing: What’s the difference?

Debt financing is one of two main options for businesses that want to raise capital. The other is known as equity financing.

By choosing the debt option, you receive your funding from a lender on the expectation that it’s repaid in full and with interest by a certain time. You’re also likely to need assets to secure your finance. This is to protect the lender if you can’t pay back what you owe.

With the equity option, there’s no need to repay the funds that you receive. It does often mean, however, that you must sell a share of the equity in your business. This means you’ll no longer have full control over your business decisions.

Need more help to discuss your options? Get in touch and talk to one of our experts. We’re here to help you get the funding that your business needs.