Summer debt funding update

Tom Cox reviews the latest developments in the funding space

The past six months has seen the debt funding market operate against a challenging financial backdrop, driven by factors ranging from geopolitical instability and tariffs through to ongoing inflationary pressure.

As can be expected, this has impacted deal activity, causing some business leaders to temporarily hold back on expansion plans as they assess their options.

Yet confidence has not been diminished. With UK interest rates steadily easing there is a growing sense that conditions have stabilised and the past few months have given businesses and lenders alike greater clarity on what “normal” looks like in this new cycle. Having also digested NI and National Living Wage rises in the last six months, businesses are now able to better understand how robust their business model truly is, allowing them to plan with greater certainty, having demonstrated an ability to maintain profitability despite cost base pressure.

Navigating heightened scrutiny

One of the defining features of the current environment is the increased scrutiny being applied to deals. Capital is available, but debt funders are far more selective about how and where it is deployed as they seek to minimise risk and generate appropriate risk weighted returns.

This caution is underpinned by ongoing uncertainty over tariffs and international trade, which adds a layer of volatility to supply chains and input costs for businesses in all sectors. For lenders, this makes it even more important to test whether businesses’ contractual bases can withstand disruption and delay and asses the real strength of underlying revenues.

As such, due diligence, both financial and commercial, has become an increasingly important process. With funders spending more time with management teams and applying greater rigour to forecasts and assumptions, businesses need to be prepared for a more thorough level of analysis and able to ensure their propositions stand up to closer examination.

Lender discipline

Alongside this, valuations have become more disciplined – particularly in high-growth technology sectors where multiples may previously have been inflated by growing excitement over AI and automation.

While sector-specific opportunities exist, debt providers are becoming increasingly focused on businesses with clear fundamentals – stable revenues, diversified customer bases and the ability to demonstrate consistent returns over time – one might argue this is not a new thesis but has been heightened more recently by geo-political uncertainty.

Deal complexity

Despite this caution, good-quality businesses can still secure highly attractive terms. In fact, with M&A volumes comparatively slow by historic standards, many lenders are being proactive in working with prospective borrowers to design structures with appropriate liquidity and flexibility to suit both sides.

In this context, it’s been interesting to note the increased complexity of deals coming to market. With fewer straightforward, high-growth or platform M&A transactions, we are seeing more unusual structures and sector-specific nuances shaping negotiations.

This includes hybrid solutions, where the combination of asset-based and cash flow facilities are used to create flexibility, as well as blended debt-and-equity arrangements that provide funding matched to capital structure risk. For management teams willing to be open-minded, this market offers opportunities to optimise capital structures and create a platform for growth.

Positioning for growth

The crucial factor is preparation – and in a market where timing and readiness can make all the difference, being proactive is key.

For borrowers, that means shaping and presenting compelling propositions backed by robust forecasts and a clear strategic rationale. For lenders, it means ensuring risks are well understood and opportunities are stress-tested effectively.

At FRP, we support management teams and lenders alike in navigating this process – from optimising capital structures and identifying the most suitable funding partners to negotiating terms that work for their long-term goals. By engaging early, businesses give themselves the best chance of success – and the breathing space needed to respond to lender scrutiny with confidence.

Whatever the wider economic conditions, debt funding will remain a vital driver of growth and investment. The current landscape may be characterised by caution, but it also presents opportunity. Those who prepare thoroughly will be in the strongest position to capitalise as activity gathers pace in the months ahead.