What a Company Should Put in Place Before Raising Debt Financing
For many growing businesses, debt can be an important tool for expansion. It can help finance new equipment, increase inventory, support working capital, or enable a business to take advantage of new opportunities.
However, before approaching a bank, lender, or debt investor, a business needs more than a good idea and ambitious growth plans. It needs to demonstrate that it understands its financial position and has the capacity to manage and repay the funding.
The first question every business should be able to answer is simple: Do we know our numbers?
A company seeking debt should have accurate and up-to-date financial records that clearly show its revenue, expenses, profitability, assets, liabilities, and cash position. If a lender asks how much the business earns or spends each month, the answers should be from up to date financial records and not estimates.
Imagine a manufacturing business seeking UGX 200 million to purchase new equipment. The business may have strong monthly sales, but if the owner cannot clearly show profit margins, operating costs, or current cash flow, it becomes difficult for a lender to assess whether the business can manage additional debt.
Knowing your numbers is therefore not just about preparing for due diligence. It is also about helping you make better decisions about how much debt your business can realistically take on.
Cash flow is equally important. A profitable business can still struggle to repay a loan if cash is not available when repayments are due. This is particularly common for businesses that sell on credit.
Consider a wholesaler whose sales are growing but whose customers take 60 or 90 days to pay. The business may appear profitable, yet still face cash shortages while waiting for payments. Taking on a loan with large monthly instalments without considering this timing could create unnecessary financial pressure.
Before raising debt, businesses should therefore prepare realistic cash-flow projections that include expected income, operating expenses, existing obligations, and proposed loan repayments.
It is also important to have a clear purpose for the funding. Saying that the business needs money “to grow” is rarely enough. A company should be able to explain exactly how much it needs, what it will be used for, and how that investment is expected to generate value.
For instance, a business seeking UGX 100 million could clearly demonstrate that the funding will be used to purchase equipment that increases production capacity or inventory that allows it to fulfil confirmed customer orders. The clearer the connection between the funding and the expected business outcome, the easier it is to demonstrate why the debt is necessary.
Businesses should also take a close look at their existing obligations before borrowing more. Outstanding loans, supplier credit, overdrafts, and tax liabilities all affect a company’s ability to take on additional debt. Understanding these commitments helps business owners avoid borrowing more than they can comfortably repay.
Tax and compliance matters should also be addressed before approaching potential financiers who commonly ask for a valid tax clearance certificate from URA, up to date tax returns, evidence that NSSF and PAYE obligations are remitted. Keeping company documents with URSB up to date, management accounts and annual financial statements can make the due diligence process smoother and strengthen confidence in the business.
Finally, every business considering debt should ask an important question: What happens if things don’t go according to plan?
What if sales decline? What if a major customer delays payment? What if operating costs increase?
A business should be able to continue meeting its debt obligations under realistic challenges, not only when everything goes perfectly.
Debt Should Support Growth, Not Create Financial Pressure
The amount a business can borrow is not necessarily the amount it should borrow. A company may qualify for more funding than it actually needs or can comfortably repay.
Before raising debt financing businesses should have a clear understanding of their financial position, reliable cash-flow projections, organized records, and a realistic plan for using and repaying the funds.
With the right financial preparation, debt can become a tool that supports growth rather than a burden that puts the business under pressure.
How StartHub Africa Can Help
Preparing for financing starts with understanding and strengthening your financial foundation. StartHub Africa supports businesses with accounting, financial reporting, tax compliance, cash-flow management, and financial planning to help them make more informed financing decisions.
Book a free consultation to start preparing your business for its next stage of growth.