Private debt has emerged as a pivotal component of corporate finance. While equity funding continues to dominate startup conversations, debt financing presents an equally compelling avenue—one that offers capital access without diluting ownership. With global capital markets experiencing uncertainty, the ability to build a private debt franchise can be a game-changer for entrepreneurs seeking financial stability and strategic growth.
The Role of Private Debt in Business Growth
The financing environment for startups and mid-sized companies has undergone a significant transformation. Traditional lenders impose stringent underwriting requirements, making it increasingly difficult for businesses—especially early-stage companies—to secure working capital loans.
For businesses operating on a capital-intensive model, such as manufacturing or infrastructure-based startups, securing funding remains a persistent challenge. These businesses require substantial upfront investment, but their revenue realization follows a deferred timeline. Consequently, bridging this cash flow gap is crucial for sustaining operations and accelerating expansion.
This is where private debt franchises come into play. By leveraging structured debt instruments such as Commercial Papers (CPs) and Non-Convertible Debentures (NCDs), businesses can unlock flexible financing options tailored to their unique cash flow cycles.
What is a Private Debt Franchise?
A private debt franchise refers to an ecosystem where a company raises capital through structured debt instruments, leveraging private networks and alternative credit markets rather than relying solely on banks or venture capitalists. This approach enables businesses to secure growth capital without excessive reliance on external funding conditions or speculative macroeconomic shifts.
Example: A Robotics Startup’s Debt Strategy
Imagine Company X, a Series A startup specializing in leasing robotic automation solutions to enterprises. The business model generates stable, recurring revenue, but it faces a liquidity gap due to upfront capital expenditures (capex) required to manufacture robots. Payments from clients are received over extended leasing contracts, creating a working capital deficit of $1 million.
Seeking traditional working capital loans, Company X encounters roadblocks: stringent collateral requirements, high interest rates, and unfavorable loan terms. Alternative credit solutions, such as venture debt and revenue-based financing, impose restrictions that misalign with the company’s operational goals.
However, by establishing a private debt franchise, Company X can issue NCDs or CPs to raise capital from its trusted network of investors. This approach not only circumvents traditional lending hurdles but also provides structured financing with favorable repayment terms tailored to its cash flow.
Understanding CPs and NCDs
Commercial Papers (CPs)
CPs are short-term, unsecured debt instruments with a maturity of less than a year. They are typically issued by companies or non-banking financial corporations (NBFCs) to finance short-term working capital needs. While CP issuance requires a credit rating, startups with strong business fundamentals can mitigate this challenge by securing funding through private placements. CPs are short-term, unsecured debt instruments with a maturity of less than a year. They are typically issued by companies or non-banking financial corporations (NBFCs) to finance short-term working capital needs. While CP issuance requires a credit rating, startups with strong business fundamentals can mitigate this challenge by securing funding through private placements.
Non-Convertible Debentures (NCDs)
NCDs serve as longer-term debt instruments, offering businesses an alternative to traditional bank loans. Unlike CPs, NCDs can be secured against company assets or receivables. For issuances exceeding one year, a credit rating is not mandatory, making them an attractive option for early-stage businesses looking to build a robust financial structure. NCDs serve as longer-term debt instruments, offering businesses an alternative to traditional bank loans. Unlike CPs, NCDs can be secured against company assets or receivables. For issuances exceeding one year, a credit rating is not mandatory, making them an attractive option for early-stage businesses looking to build a robust financial structure (SEBI).
Steps to Establish a Private Debt Franchise
- Identify Capital Requirements – Assess short-term and long-term financial needs to determine the appropriate debt structure.
- Build Investor Trust – Leverage relationships with private investors, family offices, and institutional partners to establish a reliable funding base.
- Develop a Debt Issuance Strategy – Choose between CPs and NCDs based on capital needs, repayment timelines, and interest rate considerations.
- Secure Favorable Terms – Structure debt instruments with optimal interest rates, flexible tenures, and minimal restrictive covenants.
- Achieve Investment-Grade Credit Rating – Over time, improving financial health and operational performance can help secure a BBB or higher rating, lowering the cost of capital. Achieving an investment-grade credit rating is crucial for businesses looking to reduce their cost of debt. Over time, improving financial health and operational performance can help secure a BBB or higher rating, lowering the cost of capital and making companies more attractive to investors (Fitch Ratings).
- Expand Market Access – Once investment-grade status is achieved, businesses can explore broader debt issuance avenues, including public markets and bond listings.
Overcoming Challenges in Private Debt Issuance
Credit Rating Hurdles
For early-stage companies, obtaining an investment-grade credit rating can be challenging. However, businesses can mitigate this issue by:
- Securing backing from credible investors who trust the company’s long-term potential.
- Structuring secured NCDs backed by company assets.
- Establishing a track record of timely debt servicing to improve creditworthiness.
Balancing Cost of Capital
While debt financing offers non-dilutive funding, it also comes with interest obligations. Initially, startups may face higher interest rates (12-14%), but as they scale and build credit history, they can gradually reduce their cost of debt to 8-10% through better ratings and larger issuance volumes. Initially, startups may face higher interest rates (12-14%), but as they scale and build credit history, they can gradually reduce their cost of debt to 8-10% through better ratings and larger issuance volumes (Moody’s).
Conclusion
Building a private debt franchise offers a compelling alternative to traditional financing methods, allowing businesses to access capital with greater flexibility and control. While equity funding remains a vital growth lever, integrating structured debt solutions can enhance financial resilience and long-term sustainability.
At Keev Capital, we empower businesses with strategic financing solutions, bridging the gap between capital needs and sustainable growth. Our expertise in private debt markets enables us to:
- Provide Tailored Capital Solutions – Whether it’s structuring CPs, NCDs, or hybrid financing instruments, we design solutions that align with your business model.
- Unlock Investor Networks – We connect companies with a diverse pool of investors, from institutional backers to high-net-worth individuals.
- Optimize Capital Efficiency – By streamlining debt structures, we help businesses reduce their cost of capital while maintaining financial flexibility.
- Navigate Regulatory Compliance – Our team ensures seamless compliance with financial regulations, minimizing risks in debt issuances.
- Enhance Creditworthiness – With strategic guidance, we support companies in achieving investment-grade credit ratings, paving the way for lower-cost financing options.
If you’re looking to explore how Keev Capital can assist your business with private debt solutions, feel free to contact us.
