What is debt capital?
Debt capital refers to money that businesses borrow in order to fund their operations.
Unlike equity, which is an investment in company ownership, debt capital must be repaid at a later date. The obvious question at this point, is whether all debt capital is just a loan.
Debt capital is a corporate loan, but that's where it gets tricky. Most people associate loans with personal loans, or debt that is paid out at once and is usually repaid in installments.
When businesses think about debt capital, particularly for debt capital amounts greater than $2 million, there are some important distinctions from personal loans.
What separates corporate debt capital from personal loans
The first and most important distinction is complexity. While personal loans are often disbursed in a lump sum and simply have to be paid back in recurring installments over time, larger debt capital arrangements are often disbursed over time and are contingent on certain regular reports.
If you were building a large housing complex, for example, you might take on corporate debt that covered construction costs. In that instance, your debt capital provider would probably disburse part of your capital in the first period of construction and wait to see tangible progress before providing any additional funds.
The same model applies to other industries, such as financial technology. Debt capital is often disbursed in multiple rounds, but only after certain conditions and milestones have been met.
These requirements are outlined in credit agreements, which are complex legal documents that businesses (or, more specifically, their lawyers) negotiate with their capital providers.
What makes debt capital difficult to manage
Early on, it may not be difficult for businesses to manage their debt capital. But as businesses grow, they may have multiple creditors. In addition, their operations are likely to grow more complex. A business that operates in one state and that works on one construction project is easier to report on than a business that operates across an entire region!
That's why debt capital management is an operational challenge for growing businesses.
Many types of growing businesses need debt capital. But few have the in-house expertise and technology to manage that debt capital effectively. The risk is that they fail to comply with their credit agreements, and jeopardize their access to capital.
To manage debt capital effectively, businesses need a central system of record and a clear plan for scaling. That way, they'll be able to increase their debt capital management capacity regardless of what comes their way.