4 Must-Knows Before Raising Debt Funding

Raising debt funding can be a powerful way to fuel growth, smooth cash flow, or finance major initiatives without giving up equity. But for founders and management teams, it’s easy to underestimate how complex and consequential debt financing can be. Done right, it gives you control, flexibility, and leverage. Done poorly, it can become a burden that limits strategic options and strains your business.

If you’re considering raising debt funding, here are four key things you must understand before taking the next step.

1. Know Your Debt Options (and What They Mean for Your Business)

Not all debt is created equal, and understanding the different types of debt available can help you choose the structure that best aligns with your goals.

Here are some common options:

• Term Loans: Fixed amount, fixed interest, fixed repayment schedule. Good for large, one-time investments like equipment or acquisitions.
• Lines of Credit: Revolving capital you can draw from as needed, usually tied to working capital needs.
• Asset-Based Lending (ABL): Secured against specific assets like receivables or inventory. Rates are generally more favorable if you have strong collateral.
• Mezzanine Financing: A hybrid of debt and equity, often with warrants or conversion rights. Higher risk, but often more flexible and equity-friendly.
• Venture Debt: Tailored for high-growth startups, usually to extend runway between equity rounds. Often includes warrants or success-based fees.

Each type comes with its own risks and benefits, especially when it comes to personal guarantees, covenants, dilution (or lack thereof), and repayment flexibility. Raising debt funding without a clear view of these differences can put your company in a difficult position down the road.

2. Understand Your Creditworthiness from a Lender’s Perspective

Before you raise debt, try to look at your business like a lender would. Most credit providers, especially institutional ones, will evaluate:

• Cash flow coverage: Can your business comfortably make interest and principal payments? (Typically measured with EBITDA)
• Asset strength: Do you have receivables, inventory, or fixed assets that can be used as collateral?
• Growth and profitability history: Is your revenue growing? Are margins improving?
• Management quality: Is your leadership team experienced and credible?
• Capital stack: How much senior vs. subordinated debt do you already carry?

Many middle-market companies assume debt will be easy to raise if they’re growing quickly. But lenders prioritize stability and repayment capacity over potential. Raising debt funding requires financial discipline, and you’ll need clean books, reliable projections, and clear use-of-funds documentation to be taken seriously.

3. Be Aware of Covenants and Control Provisions

One of the most overlooked aspects of raising debt funding is how it can affect your freedom to operate.

Debt often comes with covenants in the contractual agreements that can include:

• Minimum EBITDA or revenue thresholds
• Restrictions on additional debt or equity raises
• Limits on executive compensation
• Mandatory lender approvals for large decisions (like acquisitions)

If breached, these covenants can trigger penalties, increase your borrowing costs, or even lead to default, even if you’re making payments on time.

Before you sign, make sure you fully understand the non-financial terms of the loan. Seemingly small provisions can give lenders significant leverage over your business operations. An experienced debt advisor can help you avoid hidden pitfalls in term sheets and identify ‘friendly’ structures with long-term flexibility.

4. Build Toward a Strategic Exit or Refinance Plan

Raising debt funding shouldn’t be a short-term solution to a long-term problem. It should be part of a strategic capital plan that aligns with your growth objectives and ultimate exit or liquidity goals.

Ask yourself:

• Will this debt help us achieve a specific, value-creating milestone (e.g., acquisition, product launch, margin improvement)?
• How long do we plan to carry this debt? Can we refinance it on better terms later?
• Are we building toward a future event (like an IPO, acquisition, or equity raise) that could be affected by this debt structure?

Debt can be an elegant financing tool, but only when it’s used in service of a clear strategy. Avoid raising debt funding just to plug a short-term cash gap unless you have a realistic path to repayment and business value creation.

Final Thought: Partner Strategically

At ClearThink Capital, we advise middle-market companies on raising debt funding with confidence and clarity. Our role is to help you evaluate options, understand tradeoffs, and connect with the right institutional and private lenders, so you can raise capital that supports your long-term vision.

Debt doesn’t have to be complicated. But it does have to be smart.

If you’re thinking about debt financing, make sure you know your numbers, know your goals, and work with a team that puts your business first.

ClearThink Capital remains committed to providing valuable insights and strategic guidance to help businesses navigate these complexities. For a deeper discussion on optimizing your debt financing strategy, reach out to our team below.