capital-raising
Debt financing raises capital that must be serviced and repaid — bank loans, bonds, unitranche, mezzanine or shareholder loans — in exchange for interest, covenants and a claim that ranks ahead of equity.
Debt financing is money with a due date. The lender’s underwriting is cash conversion, interest coverage, leverage versus EBITDA, collateral, and the capital structure already sitting above or beside them. Unlike equity financing, a successful outcome is repayment, not a multiple of residual value.
In private equity buyouts, debt is also a tool to amplify equity returns — the LBO — which is a different purpose from an owner borrowing to fund a factory.
Senior secured, second lien, unitranche, mezzanine, holdco PIK, vendor notes, and shareholder loans that IAS 32 may still treat as equity if they have no contractual repayment. Covenants (leverage, interest cover, capex) are how lenders stay in the governance without buying shares.
A manufacturer with €4m EBITDA and €1m of existing net debt can perhaps borrow €10m at 2.5× if cash conversion is clean. The same EBITDA with 40% of profit sitting in receivables will be offered less, or a borrowing base. The “debt capacity” is an FDD question, not a slide.
Owners like debt because it avoids dilution. Lenders like it when the downside is collateralised and the plan is boring. Trouble starts when growth equity stories are financed as if they were asset-backed loans.
Using EBITDA add-backs the credit agreement will not recognise. Ignoring springing covenants. Treating a related-party loan as spare cash in a sale later — buyers will call it net debt.
Debt does not absorb losses. It also comes with default and acceleration, which equity does not.
Lenders ask for the same structured financial layer as a buyer — earnings quality, WC, debt schedule — because they are underwriting the same company. Preparing that layer once serves a raise and a future exit.