What is debt finance and what are the benefits?

Debt can sound daunting for business owners but actually can be a cost-efficient way of obtaining the finance required in the short to medium term to realise growth and expansion plans.

What is debt financing?

If you’re considering refinancing any existing debt to make it cheaper, raising funding to support investment in the business, or using the capital to facilitate a sale of shares or dividends, this may be an option for you. It involves borrowing money from a bank or other lender (e.g. a private debt fund).  Depending on the amount you’re looking for and the asset base of the business, it could be either a secured or unsecured loan.

What are the benefits?

When using debt financing, you will take out a loan or debt facility from a financial institution or bank and be obligated to make payments of interest and capital, in accordance with the agreed schedule. In some instances, a lender may consider an Interest Only option, particularly if the business is in a growth phase. Most loans will not affect your ownership of the business, as long as you make the repayments on time. You will be in control and know exactly how much you need to pay which can help with budgeting and future planning.

Depending on the status of your business, you may be able to achieve a loan that has a low-interest rate. However, if you have struggled historically to borrow money from your bank, there are plenty of other options available. It’s important to not get trapped in a cycle of borrowing so make sure any deal you go into is transparent. If you are unsure, always seek advice.

Having good business credit is essential if you’re looking for low-cost, long-term debt funding. Therefore, it’s important to build your business credit as this will help establish more favourable terms with lenders.

Another benefit of debt financing is that it may attract tax deductions. As appropriate debt finance is typically classified as a business expense, the interest payment on that debt could be deducted from your business income taxes. Overall, it can reduce your net tax obligation at the end of the year. Again, make sure to seek advice from a tax professional to make sure you are following correct protocols or ask general questions about how the debt will affect your tax obligations.

What’s next?

Understanding the funding landscape can be complex but is essential in order to make your goals achievable. There is a growing market of various finance options so it’s wise to get advice first to see which is best for you and your business. With this in mind, business owners will need to also understand the tax allowances and implications of using any debt and extracting funds.

How we can support you if you are looking to secure debt financing

Our advisors can support you through all stages of debt financing. We will work with you to:

  • Understand your key objectives and timing so that we can help advise on the right debt structure;
  • Help you approach and engage with the right lenders for your business using our extensive banking and private debt fund network of relationships;
  • Understand your objectives and approach to find the right partner, not only based on financial metrics but non-financial ones as well, such as personality, sector experience and house style;
  • Prepare materials that will position your business in the best light to potential lenders, including a business plan and information memorandum;
  • Help you prepare the business for the process, including gathering financial and other information to ensure you are ready for a potential investor’s due diligence process;
  • Understand the future cash flows of the business, using our financial modelling experts, to help you compare and contrast different lending offers to understand the impact on your equity value, your ability to service the debt, overall cost of the borrowing and the key risks;
  • Design a bespoke process and manage it closely from inception to completion, liaising with the various legal and accounting advisors, creating competitive tension amongst lenders, and minimising the burden on you as you continue to run your business;
  • Advise you and negotiate on your behalf all the key elements of the transaction to ensure you get the best deal possible;
  • Advise you of your potential tax exposure for any relevant transactions, both for you personally if appropriate as well as the business to ensure you have clarity over your net proceeds from any transaction;
  • Undertake a thorough exploration of your individual circumstances if appropriate as well as the business in order to identify and consider any tax reliefs that may mitigate your tax exposure and ensure any tax traps are understood and navigated in order to provide a bespoke tax plan as part of your strategy;
  • Advise you on alternative deal structures to ensure tax efficiency, where appropriate; and
  • Calculate the level of capital required from the financing to meet your objectives and provide security, using sophisticated cash flow forecasting tools. This helps you understand what is needed and what is aspirational. For example, could you raise debt capital to de-risk your personal objectives while retaining the potential for growth to meet aspirational targets?

Get in touch

If you would like to know more about debt financing contact your usual Mazars advisor or alternatively one of our experts via the form below or on:

Brisbane – John KotzurMelbourne – Brad PurvisSydney – Maximilien Amphoux
+61 7 3218 3900+61 3 9252 0800+61 2 9922 1166

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Authors: Paul Joyce – Partner, M&A, Zoe Davies – Partner, Tax Advisory and James Robinson – Senior Manager, Financial Planning

Published: 02/08/2023

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