Choose the right debt options

Who this is for

Founder led lower-middle market companies with 5 to 50 million in annual revenue that want simple financing rules.

The quick answer

Use an operating line secured by receivables and inventory for working capital. Use a term loan for equipment or build outs. Consider subordinated debt or venture style debt for growth investments with clear payback. Match loan length to asset life and keep covenants simple and trackable.

The method in seven steps

Define the use of funds
Working capital, equipment, build out, acquisition, or product development.
Match instrument to use
Operating line for working capital moves. Term loan for assets with useful life. Consider subordinated debt or venture style debt when growth investments have a proven path to return.
Set target terms
Amortisation that matches asset life. Advance rates that fit your inventory and receivables. Prepayment rules you can live with.
Keep covenants simple
Prefer covenants you can track monthly such as fixed charge coverage and minimum net worth.
Model headroom
Build a simple case view that tests downside against covenants and availability.
Compare two options
Bank and non bank offers can vary on speed and flexibility. Compare effective cost after fees and any warrants.
Plan reporting and relationships
Assign an owner for lender updates. Share a short pack each quarter with cash, forecast, and pipeline.

Example

A company used an operating line for seasonality and a term loan for a new line. They reserved subordinated debt for a later expansion when unit economics had strong proof.

Pitfalls and fixes

Using short term debt for long lived assets. Match life to life.
Complex covenants you cannot monitor. Keep measures simple.
Chasing the lowest rate only. Compare total flexibility and speed.

Checklist

Use of funds written
Instrument matched to use
Target terms defined
Covenant tracking plan
Headroom modelled