Funding and capital structure
Clear definitions and practical examples to help you understand the numbers and decisions.
Debt financing
Debt financing is money a business borrows and must repay under an agreement. The lender normally charges interest and may require security, financial tests, or restrictions on what the borrower can do. Unlike an investor, the lender does not receive ordinary ownership merely for making the loan, but the repayment obligation exists whether the business has a good month or a bad one.
Read the explanationEquity financing
Equity financing brings capital into a company in return for shares or through additional contributions from existing owners. It has no scheduled principal repayment, so it can absorb uncertainty that a young business cannot safely promise to repay. In exchange, the investor usually receives economic rights, voting rights, or both; the exact rights depend on the company documents and investment agreement.
Read the explanationCapital structure
Capital structure is the mix of debt and equity used to finance a company’s assets and operations. Debt can be cheaper in some circumstances and lets owners keep more shares, but it creates fixed claims for interest and repayment. Equity carries no ordinary repayment date, but it shares future value and control. The useful question is not whether one source is universally better; it is whether the mix matches the business’s cash volatility, asset life, and ability to raise money again.
Read the explanationShareholder loan
A shareholder loan is money a shareholder lends to the company, or in some arrangements money the company lends to a shareholder. The balance is debt, not an additional share subscription, unless the parties formally convert it. Its interest, repayment order, security, and treatment on a future investment round depend on the written terms and applicable requirements.
Read the explanationRetained profit financing
Retained-profit financing uses profits left in the company after prior periods rather than distributing all of them to owners. It is an internal source of funding: the business keeps resources that might otherwise be paid out and uses available cash to fund inventory, equipment, or expansion. Accounting retained earnings are not a separate pot of cash, however. They may be represented by receivables, inventory, or other assets.
Read the explanationWorking capital loan
A working capital loan is borrowing used to support the short-term cash needs of ordinary operations, such as paying suppliers, wages, or inventory before customer cash arrives. It should be matched to the cash-conversion pattern of the business: when cash is paid out, when goods or services are delivered, and when customers actually pay. It is different from funding a long-lived asset whose benefits arrive over a much longer period.
Read the explanationTerm loan
A term loan is borrowing with a stated amount, maturity, and repayment schedule, commonly used for a defined asset purchase or longer-lived business need. The borrower normally receives the funds at or near closing, then repays principal and interest over the agreed term. The schedule may be fixed or variable, and the contract may allow or charge for early repayment.
Read the explanationRevolving credit facility
A revolving credit facility is a borrowing limit that can usually be drawn, repaid, and drawn again during its availability period, subject to the agreement. Interest is generally charged on the amount actually borrowed, and undrawn fees or other charges may apply. It differs from a term loan because repayment restores borrowing capacity instead of simply reducing a fixed loan balance toward zero.
Read the explanationOverdraft
An overdraft is bank borrowing that lets an account balance fall below zero up to an agreed limit. It can cover a short mismatch between payments and receipts, but its availability, price, and repayment demand depend on the banking agreement. Some overdrafts can be repayable on demand, which means a bank may require repayment even though the company planned to use the balance longer.
Read the explanationCommitted facility
A committed facility is funding a lender has contractually agreed to make available up to a stated limit during an agreed period, provided the borrower meets specified conditions. That commitment gives more certainty than a discretionary line, but it is not an unconditional cash balance. Conditions can include giving notice, making accurate representations, staying within financial covenants, and having no event of default.
Read the explanationUncommitted facility
An uncommitted facility is a lending line the bank may allow but is not contractually required to provide on a future date. It can be useful for routine short-term payments, yet the lender can decline a requested draw or reduce access under its policies. That makes it different from a committed facility, where the lender has promised availability subject to written conditions.
Read the explanationUndrawn facility
An undrawn facility is the unused portion of a borrowing limit at a stated date. It is calculated from the contractual limit less the amount already borrowed, but it is not automatically cash the company can spend. A notice period, fees, expiry date, covenant test, or other draw condition may prevent access to some or all of the unused amount.
Read the explanationDrawdown
A drawdown is the act of taking money under a loan or facility after following its borrowing procedure. It converts an approved borrowing capacity into an outstanding debt balance. The draw may require a request form, notice, confirmation that conditions are met, and instructions for where funds are paid. Interest and some fees can begin from the draw date even if the cash is used immediately for an operating payment.
Read the explanationPrincipal
Principal is the amount borrowed that remains to be repaid, excluding interest and usually excluding separate fees. A principal payment reduces the debt balance. Interest is the charge for using that balance over a stated period, so paying interest can consume cash without reducing the amount owed. Loan statements and repayment schedules often show the two components separately for this reason.
Read the explanationInterest
Interest is the price charged for using borrowed money. It is calculated under the agreement’s rate, balance basis, and time basis; it is separate from principal repayment and may be separate from arrangement, commitment, or late-payment fees. A rate that sounds small can still create a material cash cost when the balance is large, the borrowing lasts longer than expected, or the rate changes.
Read the explanationLoan maturity
Loan maturity is the date when the remaining principal of a loan becomes due unless the loan is repaid or extended earlier. It is different from the next monthly instalment: a loan can have regular payments and still leave a large amount due on its maturity date. Extension or refinancing is not assumed merely because a lender discussed it; it needs the approvals and documents required by the relevant agreement.
Read the explanationRepayment schedule
A repayment schedule is the dated plan for paying principal, interest, and sometimes fees under a financing agreement. It turns a loan document into specific cash obligations. The schedule may show a fixed amount, declining principal, a final balloon payment, or payments that change with a variable interest rate. It is useful only when it agrees with the executed contract and current lender statement.
Read the explanationBalloon payment
A balloon payment is a large final payment of remaining principal due at or near a loan’s maturity after smaller earlier payments. It lowers the principal paid in the earlier periods, which can make initial cash payments appear easier. But it concentrates a significant repayment into one date, so the company must plan to settle it from cash, asset-sale proceeds, or approved replacement financing.
Read the explanationCollateral
Collateral is an asset or right pledged to support a borrowing obligation. Under the security documents and applicable law, a lender may have rights over the collateral if the borrower defaults. Collateral can include equipment, property, receivables, inventory, or bank balances, but the lender’s actual rights, priority, and ability to enforce depend on the documents and legal framework.
Read the explanationFinancial covenant
A financial covenant is a contractual test in a financing agreement. It may require a company to keep a ratio below a maximum, above a minimum, or satisfy another defined financial condition on stated test dates. The agreement controls the formula: its definition of debt, cash, earnings, permitted adjustments, testing period, cure rights, and consequences may differ from management reporting.
Read the explanationCovenant headroom
Covenant headroom is the distance between a financial result and the limit set in a financing agreement. A covenant is a condition the borrower must meet. Some ratios must stay below a maximum; others must remain above a minimum. Headroom therefore depends on the direction of the test as well as its formula.
Read the explanationRefinancing
Refinancing replaces an existing borrowing with new funding. A company may seek a later maturity, a different repayment schedule, or a lower financing cost. The old obligation is not resolved by an attractive offer: the new funding must be approved, available, and sufficient to settle it.
Read the explanationBridge financing
Bridge financing covers a temporary funding need until a specified event provides longer-term funds or cash. That event might be a completed refinancing, an asset sale, or an investment round. The bridge has its own repayment date and conditions; the expected later transaction does not guarantee repayment.
Read the explanationInvoice financing
Invoice financing provides funding against eligible unpaid customer invoices. The provider advances part of their value, so the business can use cash before customers pay. The amount available depends on which invoices qualify, the agreed advance percentage, reserves, and the facility limit. It is not automatically the full receivables balance.
Read the explanationFactoring
Factoring is a receivables-financing arrangement in which a business assigns customer invoices to a factor that typically also manages collection. An advance may provide cash before the customer pays. The agreement determines the fees, retained amount, collection responsibilities, and treatment of unpaid invoices.
Read the explanationAsset-based lending
Asset-based lending uses specified business assets to support a borrowing facility. Receivables and inventory are common examples. The lender values eligible assets under agreed rules and applies advance percentages to calculate a borrowing base: the amount those assets support.
Read the explanationLetter of credit
A letter of credit, or LC, is a bank’s undertaking to pay the beneficiary when the documents presented comply with the credit’s stated terms. It is documentary: the bank examines the documents required by the LC. It is also independent from the underlying sales contract, so a commercial dispute does not automatically change the documentary test.
Read the explanationBank guarantee
A bank guarantee is a bank’s undertaking in favour of a beneficiary, issued to support another party’s obligation. A contractor might provide one to support performance or repayment of an advance. The wording determines the amount, expiry, documents, and conditions for payment.
Read the explanation