A guide to debt finance for businesses

In this guide, we detail exactly what is meant by debt finance, how it works, the different types of debt finance available, its advantages and disadvantages, information about the types of businesses that can apply for debt finance, and finally, how to apply for OakNorth’s debt finance solutions. 

What is debt finance?

For start-ups and scale-ups to continue creating new jobs, building new homes, generating GDP, increasing productivity and supporting their customers, they require continuous investment. This is where debt finance comes in. Aside from equity investment, it may be an advantageous option for businesses that have reached a certain scale or point in their growth journey. 

In simple terms, debt finance (also known as debt financing or debt funding) is when a business borrows money from a bank or other type of finance provider to fund business activities such as: growth, mergers and acquisitions, management or shareholder buy-outs, and working capital, to name just a few. This funding needs to be repaid at an arranged later date, usually through regular repayments and with an added interest amount, agreed between both parties before the transaction is complete. 

How does debt financing work?

Debt finance, sometimes known as a business loan is an exchange of capital between a business and a bank/lending partner. The lender will release the agreed sum of money to the business after the terms and conditions (T&Cs) of the transaction have been agreed upon.

The terms will typically outline the repayment schedule – whether that means paying the whole amount back in full at a later date or through multiple smaller amounts over a set period. They will also always include the amount of interest that is expected to be repaid on top of the capital borrowed, as well as any loan covenants, and details focusing on the penalties that the business may incur for missing a repayment.

Debt finance designed for success

Hire top talent, expand into new regions, buy new land, property, or businesses – whatever your next growth opportunity is, don’t let cash flow get in the way. We provide debt finance from £250,000 up to tens of millions – so get started today.

Secured loans

Well known to be the most common type of debt financing option, secured loans are a type of borrowing that uses an asset – either tangible such as a property, or non-tangible such as intellectual property such as a tech product, as security. This is typically referenced as collateral, which lessens the risk for the lender if the borrower doesn’t manage to repay the loan. Items that can be used as collateral, include: stocks, debtors, plant and machinery, or personal property.


Unsecured loans

Unsecured loans typically don’t involve any collateral, with common examples including credit cards, personal loans and student loans. The only guarantee a lender has that a business will repay the debt is its creditworthiness and its word. As a result, unsecured loans are considered a higher risk for lenders and tend to therefore carry a higher interest rate.


Asset finance

Asset finance allows borrowers to access business assets such as equipment, machinery, and vehicles without having to buy them upfront. It can also allow businesses to release cash from the value of the assets they already own or use their existing assets as security against a business loan from a specialist asset finance lender. 


Invoice finance

Invoice financing is when a lender provides a borrower with an advance on their outstanding invoices. This option gives businesses instant access to funds and reduces potential cash flow issues in exchange for an invoice financing fee. This means that instead of a business potentially waiting up to 60 days to get paid, they receive their invoice value upfront.



These are financial security where a company or a government borrows a large sum of money from an institution, such as an investment bank, for a defined period at a certain interest rate. The company or government will then use this capital to finance a variety of projects such as mergers, acquisitions, or other growth activities.


The advantages of debt finance

You call the shots

A major advantage of securing debt finance is that you don’t need to give up any equity in your business in order to receive the agreed capital. This means you retain control and ownership and can continue managing how your business is run.

Maintain healthy cash flow

With repayments and interest amounts being agreed as part of the debt finance transaction, businesses are more easily able to monitor their cash flow and plan for future growth. Simply put, every business securing debt finance will know how much it needs to pay back each month, which can help with its budgeting and financial planning.

Action your growth plans

Debt finance packages can be used for a range of business purposes from supporting growth and working capital to pursuing a management or shareholder buy-out. Every business has a different growth strategy and trajectory, so finding a trusted lending partner is a vital part of the process.

Disadvantages of debt finance

Repayment requirements

An absolute certainty of debt finance is that when a business uses it to borrow money, it has to always repay the capital. This means repaying the total loan amount in full, in addition to the agreed interest amount, regardless of its cash flow situation. Debt finance lenders will have a claim for repayment before any equity investors if the business is forced into bankruptcy.


Added interest

The repayment of debt finance can become a struggle for some business owners. This is because they need to ensure the business generates enough income to pay for regular instalments of principal and interest. Many lenders will also require assets of the business to be posted as collateral for the loan, which can be seized in the event that the borrower is unable to keep up with its specific payment plan.


How is debt finance different to equity finance?

Debt finance is capital or a loan that needs to be paid back to the lender. Equity finance, on the other hand, is selling equity in your business to investors who hope to share in your future profits and benefit from your future growth. There are several ways to obtain equity financing, such as through a venture capitalist or equity crowdfunding.

It’s also worth noting that businesses don’t always have to choose between the two, as a combination of both debt and equity funding might be the best option for your business at a certain stage in its growth journey.

What types of businesses can apply for debt finance?

If a business is in a position where it can capitalise on securing debt to boost growth, then it’s the type of business that can apply for debt finance. With that being said, companies must be sure that they can meet their obligations regarding payments to lenders, which is why it tends to be a more attractive option for businesses that have turned a profit.

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What debt finance solutions does OakNorth offer and how can I apply?

At OakNorth Bank, we offer fast, flexible debt finance, with the success of your business in mind. With secured and unsecured business loans ranging from £250,000 up to tens of millions of pounds, we can provide tailored capital that caters to your growth plans, without you needing to give up equity.

Applying for debt finance with us is easy: all you need to do is fill out this short online form and a member of our lending team will get back to you to discuss your options. We provide quick ‘yes’ or ‘no’ decisions and deliver funds in weeks rather than months. We help you get funded faster, working with you to build a flexible facility in a transparent way.

Not sure which finance is for you? Check out our complete guide to UK business loans and find out which specialist facilities OakNorth can offer.

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