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Raising Finance Part 2: Exploring Debt Finance

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This article is the follow on from the Raising Finance overview article. This article seeks to explore debt finance in greater depth allowing you, the business owner, to decide upon whether raising debt finance is suitable for your business, and also informing you of the practical considerations involved in the process.

What types of Debt Finance are available?

There are two key means of raising debt finance for a company being:

  • Loans
  • Debt Securities

A loan involves the lending of money from a lender to a borrower under a Loan Agreement and is available to any type of entity, which may run a business, including a limited company, a public company, a partnership or a sole trader. In contrast, debt securities are instruments such as bonds, which large public companies can issue to investors in exchange for money. This article will focus on the provisions of the loan rather than debt securities due to the greater prevalence of the limited company as compared to the public company in the U.K.

Loans: The key documents

  • Offer letter

The offer letter sets out the key terms between the borrower and lender. These key terms include for example the amount of the loan, the interest rate and the repayment terms. Importantly, the offer letter will also set out any required conditions the lender may have to enable it to lend such as board minutes from the borrower approving the loan and any security documents.

  • Loan Agreement

The loan agreement builds upon the offer letter and sets out the above terms in detail. It will also add in further key terms such as what constitutes an event of default. An event of default is an action, which would allow the lender to accelerate the loan and demand full payment immediately, such as non-payment or the bankruptcy of the borrower.

  • Debenture

Often the lender will demand security as a condition of advancing the loan, meaning that the borrower must create a charge over assets it owns in the lenders favour. This means that should the borrower not be able to repay the loan, the lender can step in and sell the borrowers assets to recover the monies owed. The debenture is the document creating this charge. The debenture will often create a fixed charge over any fixed assets and a floating charge over non-fixed assets.

When deciding whether to opt for debt finance to bring in capital for your business, it is important to understand that, as compared to equity finance which will be explored next week, debt finance is advantageous in that it does not hand away legal ownership of your company. However, it is important to understand the legal conditions the borrower will likely insist on mentioned above, to ensure you as the borrower are aware of all the potential implications of debt finance.

If you want to discuss how best to raise capital for your business please feel free to get in touch with someone from our corporate team who would be happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.

The information contained in this article is for information purposes only and is not intended to constitute legal advice.