The textbook company borrows to build something and repays from the profits. Real companies raise money for many distinct reasons. The reason determines the right instrument far more than the interest rate does. This article walks through these uses and the funding type that fits each. Open any of the nine below to see the detail.
Recurring requirements
Working capital. The most common reason a company borrows, and the least glamorous. … read more show less
It is the money tied up between paying suppliers and staff and being paid by customers: stock on the shelf, invoices outstanding, less the credit your own suppliers give you.
A distributor on 60-day customer terms and 30-day supplier terms funds a month of its own sales permanently, and every increase in sales widens the gap.
The right funding is short-dated and flexible.
- An overdraft for the daily wobble
- A revolving credit facility for the seasonal swing
- Receivables finance where the invoices are good collateral
The classic mistake is treating a permanent working-capital need as temporary, and funding it on a costly overdraft the bank can withdraw on demand.
Cash-flow deficits. The cousin of working capital, but harder to plan for. … read more show less
A lost customer, a delayed contract, a bad quarter. The business is sound but the cash isn't there this month.
Committed facilities exist for this moment, but they work best when they were negotiated in advance, not sought under pressure. An uncommitted line reviewed annually adds a small cost, but it's a price worth paying if it gets you through a bad quarter.
Growth & value creation
Capital expenditure. Spending on long-lived assets: plant, vehicles, property, IT infrastructure. … read more show less
The assets support the business over the longer term, so the funding should be longer too. The natural fit:
- Term loans
- Leasing
- Hire purchase
- Bonds, for larger companies
Fund a ten-year asset with a three-year loan and you have signed up to refinance it twice, taking a risk on market conditions each time. That is the mismatch that broke Northern Rock in 2007, and it breaks corporates on a smaller scale every cycle.
Growth investment. Broader than capex: new markets, new sales teams, new product lines. … read more show less
The distinguishing feature is that the return is uncertain and the spending often shows up as an operating loss rather than an asset. Lenders are wary of funding losses, which is why growth is more often funded with:
- Equity, which shares the rewards
- Growth debt priced to reflect the uncertainty
A bank views a loan against a growth plan very differently to a loan against a clearly productive or valuable asset. This will be reflected in the cost & the terms.
Research and development. The far end of that spectrum: the spend is large and the outcome binary. … read more show less
The asset, if it appears, is intellectual property that is hard to value and harder to repossess. Most of the work is done by:
- Equity
- Grants
- R&D tax credits
Funding R&D is rare outside pharma and deep-tech where it is supported by strong existing royalties or other cash flows.
Acquisitions. The largest single funding events most companies ever undertake. … read more show less
The purchase price is a lump sum, payable on completion, and the consideration is often several years of the buyer's own cash generation. Acquisition finance is a specialism in its own right, but the fundamentals are simple:
- The debt is sized against the combined group's cash flow
- The lender will want to see the synergies before believing them
- The bridge loan that gets the deal done is expensive, and is meant to be refinanced quickly
Balance sheet management
Refinancing existing debt. The reason for a surprising share of all borrowing, despite the advice throughout this series. … read more show less
Bullet structures, where the full loan nominal is repaid at the maturity date, outweigh amortising schedules, which pay down gradually. Debt matures, and unless the company has the cash to repay it, new debt replaces old. This is routine when markets are open but daunting when they are not.
The key is discipline & timing.
- Start engaging with lenders well in advance
- Stagger maturities so no single year carries too much risk
This allows you to refinance when the market is friendly rather than when the calendar forces you. The refinancing risk article covers this in full.
Shareholder distributions. Dividends and buybacks, increasingly debt-funded, particularly among investment-grade corporates. … read more show less
The logic is that debt is cheaper than equity, so replacing some equity with debt lowers the overall cost of capital. It holds while markets are rising, and cash flows can support the debt, but entering a downturn with more debt and less equity can leave companies in a vulnerable position.
In private companies the same instinct appears as a dividend recap, where a sponsor borrows against the business to return cash to its investors. Lenders price these carefully. Borrowers should too.
Liquidity and contingency funding. Money raised not to spend but to hold. … read more show less
We've mentioned the Boeing example previously.
- Undrawn committed facilities
- Pre-funded bonds
- A cash buffer sized to survive a stress scenario
It costs money to hold, through commitment fees on undrawn lines or negative carry on cash raised early.
At a different scale again, this takes the form of contingent capital.
- AT1s
- MREL
- CoCos
- NVCC
An expensive alphabet soup of subordinated debt, and hybrid capital all specifically designed to meet balance sheet capital requirements for regulated financial institutions.
Match the money to the need
Each of the uses above has a natural funding type, if not an outright matched source. Tenor should match the life of what it funds, flexibility should match the volatility of the need, and the provider's risk appetite should match the uncertainty of the return. For certain uses, the source is even more specific. The recurring error isn't just borrowing too much or too little, it's borrowing the wrong type.
The same job at three sizes
Start-up. The needs are growth investment, R&D and the cash-flow deficit that is the business plan itself. … read more show less
Almost everything is funded with equity and grants, because there is no cash flow to lend against. The one funding question that matters is runway. How long until the next raise. Base your needs off the downside forecast, not the pitch deck, and start planning 18 months in advance.
Established mid-market. All of the needs appear, often in a single company. … read more show less
Working capital and capex are bank-funded; acquisitions bring in a wider lender group; specific facilities for invoice discounting, asset financing, asset based lending. The treasurer's job is to keep the needs separate in the funding structure, so that the revolver funds the swings, the term debt funds the assets, and nobody is funding dividends on the overdraft.
Large corporate. Refinancing and liquidity management dominate. … read more show less
A rated corporate with a bond curve spends more time replacing old debt than raising new, and holds undrawn syndicated facilities as a backstop and contingency. Distributions are a policy question decided alongside the target rating rather than an afterthought.