Types of Debt Funding. And our favorite funds deploying Debt right now

There’s a whole world of funding out there that doesn’t dilute your business and doesn’t require a 60-page RFP response.

Debt financing, depending on your business model, growth stage, profit margins and cash flow, might be the most efficient way to finance your next chapter and/or give you a good bridge to your next raise.

There’s

• Debt that can help you cover short-term working capital gaps.

• Debt that helps you finance big purchase orders.

• Debt that functions almost like equity or grants —but with less interference.

In short, someone lends money to your company and expects repayment with interest.

The most common types of Debt facilities

Trade Finance

A coffee supplier in Kenya loads a ship with coffee beans bound for the Netherlands. It will take 2 months to arrive. In the meantime, someone has to pay for this. The coffee buyer doesn’t have enough capital so they enlist the help of the bank.

The bank owns the coffee from the time it’s loaded in Mombasa to the time it is unloaded in Rotterdam. If the buyer can’t pay when it gets to Rotterdam the bank can auction it off since it is a commodity product.

• There are impact-focused trade finance funds in Africa now that specialize in agricultural exports and offer better terms than traditional banks

• More below 👇 (for premium subscribers)

Term Debt

I want to buy a factory and repay over 5 years. This is a long time to repay but I can use the factory itself as a sort of collateral.

If I fail to repay, the lender can take over the asset.

• This is the classic “business loan”—used to acquire long-term assets like machinery, land, or infrastructure that generate value over time.

• The lender gets repaid in equal installments (or via a custom repayment schedule) over the loan term with high interest

• Our favorite Term Debt providers below 👇 (for premium subscribers)

Senior Debt vs. Junior Debt (aka subordinated debt or debentures)

Senior is paid first… before junior debt. Imagine there is a bankruptcy or liquidation, the senior debt is at the top of the preference stack, whatever is left is paid to the junior debt and whatever is left after that is paid to the preferred stock… after that, to the common stock (held by the employees and the founders).

• Senior debt is lower risk but also carries a lower interest rate than Junior debt.

• Senior debt often has collateral while junior debt (or debentures) often do not.

Invoice Discounting/Invoice Factoring

I need to pay farmers for their milk today. I’ll deliver to the supermarket tomorrow (and send them an invoice) but they won’t pay that invoice for 90 days. Now I have to wait 90 days to get the money I need to buy more milk. Invoice Discounting means a lender gives me 90% of the value of the invoice today so I can buy more milk and they collect the 100% in 90 days from the supermarket.

Strictly speaking, this isn’t a form of debt. This is the sale of an asset where the asset is the unpaid invoice. No liability appears on the balance sheet of the company.

Great for B2B businesses with large, reputable customers but slow payment cycles.

• Our favorite Invoice Factoring Organizations below 👇 (for premium subscribers)

Working Capital Loan

Used to finance the day-to-day operations of your business—buying raw materials, inventory, covering payroll, smoothing over seasonal cash flow gaps.

• These are short-term, relatively flexible, and often tied to a specific operating cycle.

• The lender expects repayment often as revenue comes in from normal business activities.

• Warning: This isn’t long-term financing. Don’t use a working capital loan to build a new warehouse. That’s a mismatch—and it could sink your cash flow.

• Our favorite Working Capital Facility Providers below 👇 (for premium subscribers)

(Line of Credit would be an example of this…)

Line of Credit

Debt where the borrower can withdraw up to a certain amount, often for buying inventory, and then repay as inventory is sold.

This is a form of revolving debt: You get access to a maximum limit (say $100,000) and can draw down as needed. As you repay, the balance resets, just like a credit card.

• Ideal for inventory-based businesses or companies with uneven revenue cycles

• You pay interest only on what you use—not the full approved amount.

• Allows you to (less abruptly) build a history with your lender—even if you don’t use the full line at first.

• Responsible use leads to bigger limits and better rates.

Mezzanine Finance

A combination of equity and debt that carry an interest rate + a percentage of equity or a percentage of revenue.

• These are often unsecured by collateral. So interest rates can get high

• Mezzanine lenders can help when banks say no but VCs aren’t a good fit either.

• Fairly rare for all intents and purposes

• Our favorite Mezzanine Funds below 👇 (for premium subscribers)

Revenue-Based Financing (RBF)

Instead of fixed repayments, you repay a percentage of your monthly revenue until a pre-agreed multiple is paid (e.g., 1.5x or 2x the original loan).

• No equity dilution, no collateral, and fewer covenants—but it can get expensive over time depending on your growth rate.

Community or Peer Lending Platforms

This form of debt doesn’t come from a bank or institution—it comes from people, often strangers, who believe in your mission.

Facilitated by Platforms, “crowd sourcing”, allows you to raise small amounts of debt capital (typically $1,000–$50,000) with modest interest rates.

Good for when you have a strong community presence, mission-driven work (in underserved communities), and a compelling story.

• Our favorite Peer Lending Platforms below 👇 (for premium subscribers)

Recap

Lots of different types of debt funding out there. Grants are here (and all over this Substack). And types of equity is here.

Need help finding the right debt funders? 👇 (for premium subscribers)

But why spend your time looking through and analyzing? Let us get you on the phone with investors. $1,000 a month in exchange for 4 or more relevant introductions and opportunities to pitch. Email daniel@thegrant.co.

And remember… even with all the different types of funding out there. Your customers and your good old fashioned sales will always be the best type.

Why your best funder isn't a funder at all

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Some of our favorite debt providers (by type) and who’s got money now