Managing Your Cash Flow

Debt finance: Why The City Grump got it wrong

2 min read

07 February 2012

Last month, The City Grump posted a column on the "evil debt weed". But debt finance is no bad thing. On the contrary, it's central to UK business growth.

In an uncertain economic environment, it’s more important than ever that companies are able to grow and prosper. Banks are central to this – they’re one of the key sources of finance to businesses. Among other things, they provide debt for working capital, capex and future expansion.

But there is a school of thought which incorrectly views debt finance as a bad thing

While the benefits of equity backing should not be underestimated, many management teams are wary of relinquishing shares. Supplementing such investments with sustainable debt packages allows management teams to retain appropriate stakes – and levels of control – in their businesses. 

Equity capital commonly takes time to source, negotiate and finalise, given the necessary due diligence and legal processes required. 

Debt financing decisions, meanwhile, can usually be made quickly – that’s crucial when a swift response to commercial opportunities, such as new contracts or expanded order books, is required. 

It is difficult to predict how the economy will fare in 2012 and it would be easy to be pessimistic about the outlook going forward. However, there are very many well-run and strong UK businesses around which are increasing their turnover, growing market share and generating profits and cash. Sustainable, appropriately structured debt funding can help underpin these businesses, giving them greater stability and a platform for growth. 

Debt finance helps companies flourish. These types of funding packages allow banks to get closer to businesses, helping them to create jobs and better shareholder value for entrepreneurs, owner managers and stakeholders. 

The business plans for many UK companies show an encouraging picture. Historically, they have grown their sales and profits – and are forecasting to do so in the future. These are the kind of companies which should be able to attract debt funding, not just to manage their day-to-day swings in working capital by means of an overdraft, but to provide term debt for expansion, investment in the business or strategic acquisitions and bolt-ons.

Ian Sale is managing director of Lloyds Bank Wholesale Banking & Markets acquisition finance.