Debt.
A word often loaded with negative connotations, and yet, we often seek it out to help us for personal and business growth. So, what is debt financing?
Debt financing is like giving your business a financial boost by borrowing money from outside sources. Instead of selling off pieces of your company (like you would with equity financing), you’re taking external financing to access the cash you need.
Here’s how debt financing works:
You borrow the funds, then use them to fuel your growth – whether that’s expanding your operations, buying another company or just keeping things running smoothly – and then pay back what you owe, with interest on top.
The best part? You get to keep full control of your business since you’re not giving away any ownership to your lenders.
Debt financing is all about leveraging someone else’s money to grow your business – whilst keeping the reins firmly in your hands.
But isn’t debt always bad?
We can use debt positively in our day-to-day lives in many different ways, and it can help us to build future capital. Examples of this are taking out a mortgage on our first home so that we can pay our monthly mortgage into house equity – so into our own money pot – rather than paying it into the back pocket of a landlord.
We also take out a student loan to get the higher education we need to secure a future higher-paid job; and we even may take out a loan to buy a reliable car, to get us to and from work, again securing future capital.
So, although the term can feel pretty weighty, stark or even stress-inducing, we know that getting into debt, in the right way and within the right circumstances and guidance, can make us richer and happier, and can help us reach our goals faster in the long-term.
When people who aren’t in the world of finance ask what I do for a living, and I tell them that I help people raise debt with debt financing, it has certainly earned me some disconcerting looks in the past.
After all, when people are looking to raise debt, most would advise them to not raise any debt at all, with the secondary advice to be careful whilst doing it – and I don’t disagree, because raising debt should always be done in the right way, in the right circumstances and with the correct guidance.
When you’re in the world of business and you’re looking to get from A to B – fast – debt financing will be the quickest way to get there without giving up equity.
Boosting your capital reserves = boosting your business’s growth.
So borrowing debt, when done responsibly, is a very effective tool to help your business reach its potential.
Risk-adverse people can be very much put off from any kind of debt – it’s a prospect that can be daunting, but yet, shying away from it can often lead businesses owners to work double-time to raise the same capital, which can often lead to burn-out and slower business growth.
Want to know more about debt financing by the big names? Here are some key examples to further answer the question ‘What is debt financing?’:
Netflix
Strategy: Netflix extensively used debt to finance its transition from a DVD rental service (yes that’s right, they were once in the dying dino industry of DVDs) into a global streaming platform. The company has raised over $16 billion in debt since 2011 to fund content production, technology development and international expansion, with minimal equity raising.
Outcome: This approach has allowed Netflix to invest heavily in original content, differentiating itself from competitors and building a loyal subscriber base of over 200 million users. By 2021, Netflix announced that it no longer needed to borrow for day-to-day operations, having reached a point where its revenue could cover both its operational costs and debt repayments. Netflix is now the largest global streaming platform in the world.
Uber
Strategy: Uber has masterfully leveraged debt financing as a key tool to fuel its rapid growth. Uber secured a whopping $2 billion leveraged loan, which was a strategic decision that allowed Uber to keep its cash flow firm and healthy, without sacrificing shareholder equity.
Recognising that raising debt can be a more cost-effective way to raise capital than equity, Uber used this approach to bolster its financial standing. By choosing debt over equity, Uber kept its shareholders happy whilst still driving forward its ambitious growth plans – a winning combination for any budding business.
Outcome: Uber’s finance-savvy use of debt financing has been central to its growth strategy and financial stability. By tapping into debt responsibly, the company has been able to make significant investments into its app, broaden its service offerings and achieve positive cash flow. These efforts have not only supported Uber’s immediate goals, but they have also laid a very solid foundation for its long-term success, in a market with strong emerging competitors.
Amazon:
Strategy: Amazon strategically tapped into debt financing by raising a staggering $16 billion through traditional corporate bonds; this move was key to financing its game-changing acquisition of Whole Foods which expanded Amazon’s footprint in the grocery sector and seamlessly integrated physical retail with its own powerful online platform.
Beyond the acquisition, these funds also fuelled Amazon’s goliath investments in infrastructure, including the development of cutting-edge order fulfilment centres, as well as through advanced technology to bolster its e-commerce operations and cloud computing services.
Outcome: Amazon’s adept use of traditional debt financing has been a driving force behind its expansive growth strategy. By leveraging debt, Amazon was able to execute strategic acquisitions, invest heavily in infrastructure, and strengthen its global market presence, but crucially, this was done without compromising its financial stability. Today, Amazon is the largest global retailer in the world.
How does this relate to my own debt financing strategy?
If you’re an SME business reading this, you may be thinking “how can I relate to these three goliaths?” Whilst undoubtedly it is easier for larger corporations to borrow, given their size, standing, reputation and ability to leverage their balance sheet. However, SME businesses can also benefit from debt financing, as it gives you the option to get to your desired destination faster and without diluting equity.
The Punchline: Borrow to Grow, But Borrow Wisely
Debt financing is crucial for propelling growth and widening the horizons of your business, without giving away equity, and in turn, power over your own business.
It’s essential to borrow responsibly and within your means, which is where speaking to Altocrest Advisory can help you to create a solid plan, understand the risks and ensure that the debt taken on is manageable.
By approaching debt with a strategic mindset, SMEs can unlock new levels of growth, innovation and success to reach goals and ambitions in a much faster time. Contact us today to book in a free consultation to see how Altocrest Advisory can help your business grow.
