Raising Debt Finance and Refinancing
By Tom McCollum, ACA · Former KPMG Corporate Finance · Compass & Ledger
The short answer
Lenders care less about your upside and more about whether you can repay. They test debt service cover under a downside case, check that historic numbers are reliable, and set covenants you'll have to report against for years. Prepare a model built around cash and repayment, a lending pack that answers their questions upfront, and reporting you can deliver after completion.
Debt can be cheaper than equity and doesn't dilute ownership, but it comes with obligations equity doesn't: fixed repayments, covenants and security. This guide covers what lenders assess and how to prepare, whether you're raising new debt or refinancing existing facilities.
How lenders think differently from equity investors
An equity investor asks how big this could get. A lender asks what happens if it goes wrong. That changes what matters:
- Cash flow over growth. Lenders want predictable cash to service debt.
- The downside case over the base case. Your lender will stress-test your forecast; yours should already show the answer.
- Security. What the lender can claim if repayments stop.
- History. Reliable historic numbers count for more than forecasts.
The numbers lenders test
- Debt service cover: operating cash flow available to cover interest and repayments. Lenders commonly look for comfortable cover, often at least around 1.25 times, and they'll test it under their own downside assumptions.
- Leverage: total debt relative to earnings (EBITDA).
- Liquidity: cash and available facilities after the deal.
- Quality of earnings: whether reported profit reflects repeatable cash generation, after one-off items and owner-related adjustments.
Covenants: headroom matters as much as the rate
Most facilities come with covenants, typically on debt service cover, leverage or minimum cash, tested quarterly. Founders often negotiate hard on rate and fees and accept covenants that leave little room. A covenant breach can give the lender significant rights, even if you've never missed a payment. Model your covenants under a downside case before you sign, and negotiate for headroom.
Types of debt
- Bank term loans: typically for businesses with profits and security.
- Asset-based lending: borrowing against receivables, inventory or equipment.
- SBA loans (US): government-backed loans widely used by small businesses and acquisition buyers, with specific eligibility and guarantee requirements.
- Venture debt: for venture-backed companies, usually alongside an equity round.
- Project finance: for capital projects, repaid from the project's own cash flows.
The right structure depends on your cash flows, assets and growth plans. A mismatch, such as short-term debt funding long-term assets, causes problems later.
Refinancing: start earlier than you think
Refinancing is easier when you're not under pressure. Start 6–12 months before a facility matures or a covenant gets tight. Multi-entity groups often need extra time: lenders want consolidated numbers that reconcile across every entity, and that's frequently where reporting falls short.
On one engagement, a multi-entity healthcare business preparing to refinance had reporting that didn't reconcile across its entities. We rebuilt consolidated reporting so the group spoke with one set of numbers before lenders reviewed it.
What goes in a lending pack
- Historic accounts and management accounts, reconciled.
- A cash-flow-focused forecast with base and downside cases.
- Debt service cover and covenant calculations, by quarter.
- Details of security, existing debt and any guarantees.
- An explanation of adjustments to earnings.
- A clear statement of how much you need, what for, and how it will be repaid.
After completion: reporting
Lenders expect regular compliance certificates and management accounts, often quarterly or monthly. Build the reporting before you sign, so the first covenant test isn't a scramble.
Frequently asked questions
What is debt service cover?
The ratio of cash available to cover debt payments to the debt payments due. Lenders use it to judge whether you can afford the loan.
How long does a refinancing take?
Often several months, longer for multi-entity groups. Start 6–12 months before maturity.
Is debt better than equity?
It's cheaper and non-dilutive, but it has to be repaid and comes with covenants. The right answer depends on how predictable your cash flows are.
Preparing a debt raise or refinancing?
We build the model lenders need, prepare the lending pack and put covenant reporting in place. Recent work includes a multi-entity healthcare group refinancing and an industrial platform raising project finance across five sites. Pricing is quoted on the call.
Thirty minutes. No pitch. Your situation, and what we would do about it.
If we are a fit, we will say so. If we are not, you will hear that too, and where to look instead. Either way you leave with a clearer picture of what good finance looks like for your business.