Debt Financing for Growth: What It Is, How It Works, and When to Use It

By Dave Costello and Doug Zeisel, TCV Growth Partners:

Running a business means balancing growth opportunities with financial realities. Whether you're expanding, covering cash flow gaps, or fulfilling large orders, debt financing can be a smart way to get the capital you need—without giving up ownership.

In this post, we’ll walk through the most common types of debt financing, including some lesser-known but powerful tools like accounts receivable financing, factoring, purchase order financing, and mezzanine financing. We’ll cover what they cost, when to use them, and how to choose the right fit for your business.

What Is Debt Financing?

Debt financing is borrowing money that you agree to repay over time, usually with interest. Unlike equity financing, you don’t give up a stake in your business—you just take on the responsibility to repay.

Types of Debt Financing (And What They’re Good For)

Bank Loans

Loans from traditional banks are typically the lowest cost of capital and because the interest rates are low, banks must be careful and only lend to credit worthy businesses. Below are the various forms of loans available from banks.

Term Loans - For established businesses with strong credit ratings seeking a lump sum of capital to be repaid over a fixed period of time.

• Best for: Established businesses with strong credit ratings.

• Cost: 6–12% interest.

• Use: when you need a lump sum for expansion, equipment, or real estate

Bank Lines of Credit - Flexible access to capital (similar to a credit card). Again for established businesses with strong credit ratings.

• Best for: Managing short-term cash flow

• Cost: 8–15% interest on used funds

• Use: When you need flexibility for day-to-day expenses

Commercial Real Estate Loans

• Best for: Need large lump sum of capital

• Cost: 8–15% interest on used funds

• Use: For purchase of land or buildings

• How it works: You get a lump sum of cash that is collateralized by the purchase you are making. Repayments are made monthly with a lump sum due at the end of the term.

  
  

Equipment Financing

• Best for: When a large sum of cash is needed for equipment purchase

• Cost: 8–15% interest on used funds

• Use: For purchase equipment

• How it works: You get a lump sum of cash that is collateralized by the purchase you are making. Repayments are made monthly with a lump sum due at the end of the term.

SBA Loans

• Best for: When your company is not old enough to provide a credit history

• Cost: 8–15% interest on used funds

• Use: for a variety of needs

• How it works: The SBA provides a guarantee to the bank in case of default. Both the SBA and the bank will require personal guarantees by the business owner.

Alternative Lending Sources

Companies that cannot qualify for traditional bank loans can seek the following (higher cost) alternative loans

Accounts Receivable Financing

• Best for: Businesses waiting on customer payments

• Cost: 1–3% of invoice value per month

• Use it when: You need cash now but have outstanding invoices

• How it works: You borrow against your unpaid invoices and repay once your customers pay. It’s a great way to unlock cash tied up in receivables.

Factoring of Receivables

• Best for: Businesses with slow-paying customers

• Cost: 2–5% of invoice value, plus interest

• Use it when: You want to offload collection risk and get paid faster

• How it works: You sell your invoices to a third party (a factor), who collects from your customers. You get paid upfront—minus a fee.

Purchase Order Financing

• Best for: Product-based businesses with large orders

• Cost: 1.5–6% per month

• Use it when: You’ve got a big order but need funds to fulfill it

• How it works: A lender pays your supplier directly so you can deliver the order. Once your customer pays, you repay the lender. Frequently used in tandem with Accounts Receivable Financing

Mezzanine Financing

• Best for: Established businesses planning major growth or acquisitions

• Cost: High—often 12–20% interest, plus equity or warrants

• Use it when: You need flexible, high-risk capital and are okay with giving up some upside

• How it works: Mezzanine financing is a hybrid of debt and equity. It’s technically a loan, but if you can’t repay, the lender may convert it into equity. It’s often used in leveraged buyouts or big expansions when traditional loans aren’t enough. It’s risky and expensive—but it can be a powerful growth lever.

Bonds and Debentures

• Best for: Larger companies

• Cost: Varies based on credit rating

• Use it when: You need long-term capital for major projects

• How it works: Bonds are loans from investors. Debentures are unsecured versions. Both are more common for large corporations.

Peer-to-Peer (P2P) Lending

• Best for: Startups and small businesses

• Cost: 7–30% depending on credit risk

• Use it when: You need fast, alternative funding

• How it works: Online platforms connect you with individual lenders. It’s flexible and fast, but rates can be high.

Credit Cards

• Best for: Emergency or small purchases

• Cost: 15–25% interest

• Use it when: You need quick access and can pay it off fast

Family, Friends (and Fools) - the 3F's

• Best for: Early-stage businesses

• Cost: Often low or negotiable

• Use it when: You need seed money and have a strong support network

• How it works: Completely up to you - beware, you may lose a friend or alienate a family member if you are unable to repay them.

What Does Debt Financing Cost?

Costs vary widely depending on the type of financing, your creditworthiness, and the risk involved. Here’s what to consider:

• Interest Rates

• Fees (origination, maintenance, etc.)

• Collateral Requirements

• Equity Kickers (in mezzanine deals)

• Tax Benefits (interest is often deductible)

When Should You Use Debt Financing?

Below are some scenarios and options for debt financing

Scenario	Recommended Option
Waiting on customer payments	Accounts receivable financing or factoring
Big order, no upfront cash	Purchase order financing
Daily operations	Line of credit
Equipment or property	Bank loan
Startup funding	P2P lending or family/friends
Major expansion or acquisition	Mezzanine financing or bond
Seasonal cash flow	Line of credit or credit card

Pros and Cons of Debt Financing

Pros:

• Retain ownership

• Predictable payments

• Tax-deductible interest

• Builds credit history

  
  

Cons:

• Must repay regardless of performance

• Can strain cash flow

• May require collateral or equity (in mezzanine deals)

• High costs for alternative financing

Final Thoughts

Debt financing isn’t just about bank loans anymore. With tools like accounts receivable financing, factoring, purchase order financing, and mezzanine financing, businesses have more options than ever to fund growth, manage cash flow, and seize opportunities.

The key is to match the right financing tool to your specific need—and understand the cost and risk involved. Used wisely, debt can be a powerful way to grow your business without giving up control. Need help in considering your options? Contact Dave@TCV-Growth.Partners or Doug@TCV-Growth.Partners