ICAEW.com works better with JavaScript enabled.

Debt finance: Key considerations

Author: Business Finance Guide

Published: 01 Jun 2016

Support from the Business Finance Guide on what businesses need to consider when taking on debt finance.

There are many factors to take into account when a business takes on debt. However, debt can be a good thing when it provides the business with added flexibility or supports future plans.

Consider the following before making any firm decisions

  • Lenders will always take into account a potential borrower’s personal or business credit record when deciding whether or how much to lend.
  • Loans are less flexible than overdrafts, and charges could be payable on funds not used.
  • There may be penalties for early repayment of debt.
  • Being locked into a rigid repayment schedule can prove problematic if cash flow is seasonal or erratic.
  • Overdrafts are repayable on demand and so can be reduced or called in if the finance provider thinks that the business may be in difficulty.
  • There are likely to be penalty charges for exceeding an overdraft limit.
  • Security against the loan will almost always be required, as will personal guarantees from directors or owners.
  • If a business is growing, the amount of asset-based finance will track the growth.
  • Care should be taken when setting the repayment terms for a lease to ensure it is at least as long as the agreement. You can find out more from the Finance and Leasing Association.
  • Interest rates in peer-to-peer (P2P) business lending are often set by the market on the platform and reflect the level of supply of business loans.

Next steps

To start your finance journey, use our interactive tool.

Finance at every stage

Business financing is not a one-off decision, but an ongoing and evolving situation. No decision can be made in isolation to the businesses journey. Find out more about what options are suitable now and what might work at another stage.

Business Finance Guide
More support to your inbox

ICAEW publishes daily, weekly and monthly emails offering viewpoints, interviews and features that make the connection between global economic issues, chartered accountancy, individual members and business.

Industry insight
Business Finance Guide
Our partners

Find out about the more than 20 industry partners that contribute to the Business Finance Guide.

Read about our partners
Trusted business advice
The words 'BAS - ICAEW Business Advice Service'
ICAEW Business Advice Service

The Business Advice Service connects owners of SMEs with ICAEW regulated firms who will provide a free initial consultation, without obligation.

Find a BAS firm or Chartered Accountant
Expert insights
Corporate Finance Faculty
Corporate Finance Faculty

Join the largest network of professionals involved in corporate finance and access a range of authoritative best-practice and technical guidelines. Keep on top of emerging trends and policy issues.

Find out more