Growing a business through debt

Nov 20, 2023

Key matters for a borrower to consider

Debt is a powerful strategic tool that can expand market reach, diversify portfolios, and provide a competitive edge without diluting the shareholdings of founding members. It can be used to finance acquisitions, enhance working capital, acquire assets, or generally assist cash flow.

In this article, we explore how incremental or accordion facilities can be utilised by a borrower and consider protections for a borrower to freely operate their business within the parameters of debt funding.

However, what features would commonly be seen in an accordion facility?

Interest rates

Interest rates are the heartbeat of any borrowing agreement. Incremental facilities can provide the opportunity for interest rates that align with your acquisition endeavours/business plans. Interest is a cost which can be de-risked by successful financial performance.

Interest ratchets can be tailored to a business by aligning trigger events or conditions for rate adjustments with the specific, financial, and operational dynamics of a borrower’s business. These mechanisms are triggered by specific events like reaching a certain level of EBITDA. These conditions are negotiated between a borrower and a lender as part of the overall agreement.

For example, as a borrower, by meeting targets such as a pre-set debt-to-equity ratio of no more than 2:1, you can secure a lower interest rate, earning reductions in the interest rate through the successful execution of targets. Simultaneously, rewarding a lender with increased confidence in your ability to cover repayment terms, further building the relationship and increasing future opportunities.

Alternatively, a lender may seek to include trigger events that can increase the interest rate such as upon a change of control event. As a borrower you should seek to limit the circumstances in which such a ratchet can be triggered and request a maximum increase limit.

Permitted baskets

Within incremental facilities, permitted baskets offer you predefined actions or obligations you can undertake without breaching covenants or restrictions. In the context of an accordion facility, this is important as it provides exceptions or allowances for the use of proceeds of additional debt, defining specific purposes for which a borrower can utilise funds such as:

Cash Sweep Payments: dictate how excess cash generated by a borrower is used. When the trigger is met, the excess cash is “swept” from the borrower’s accounts and applied to repay the outstanding loan amount, ensuring efficient use of funds, minimised risk for lenders and ensures surplus funds are not idle but rather used towards reducing debt.

Permitted acquisitions: allowing borrowers to make further acquisitions up to a certain size or within specific industries, whilst complying with your credit agreement terms.

Permitted Distributions: provide the ability to make distributions whilst utilising incremental funds. Allowing flexibility for a borrower to reward shareholders, whilst ensuring you do not jeopardise your ability to meet repayment obligations.

Debt repayment: allowing the repayment of existing debt obligations.

Working capital requirements: which can encompass short-term operational needs such as payroll and accounts payable.

These baskets offer you the dexterity to secure additional financing without the hassle of renegotiations or seeking consent, preserving not only your convenience but also safeguarding the interests of all parties involved.

Financial Covenants

Amidst growth, maintaining financial health is paramount, cash is key.

Financial covenants within incremental financing arrangements can be designed to ensure you as a borrower maintain certain financial metrics or ratios. Not only do they provide targets and checkpoints to keep you accountable during your acquisition journey, but also pave the way for more favourable terms, boosting your relationship with the lender who appreciates your commitment to such targets.

Setting specific benchmarks encourages financial discipline and management at a critical time. For example, minimum liquidity levels, or a capital expenditure limit such as the borrower may be prohibited from paying dividends above a certain threshold without the Lenders consent.

However, this does come with a health warning. As a borrower, you should always analyse your financial capacity and ability to meet such ratios and benchmarks before entering into an agreement.

Equity Cures

Equity Cures are your secret weapon against potential covenant breaches. These are contractual clauses within incremental facilities that allow a borrower to infuse additional equity capital into their business in order to swiftly remedy a breach of financial conditions. Such provisions can ensure compliance and provide a mechanism to address any breaches of financial covenants.

In operation, they operate so that the relevant financial covenants are retested on a pro forma basis to take into account additional cash, with the precise scope of such equity cure right often being heavily negotiated, in particular, how the additional equity is to be treated when resting the financial covenants. This injection of cash can be agreed to be used to increase cash flow, and EBITDA, or alternatively applied to reduce borrowings.

Incremental facilities emerge as not just financial tools, but catalysts that can unlock strategic growth and bolster financial stability. From interest rates that provide a roadmap of predictability to permitted baskets that streamline actions and equity cures that avert breaches, each facet of incremental facilities empowers you to drive your acquisition strategy.

If you require more information on taking debt, please contact us to speak to a member of our Corporate & Commercial Team.

This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.
Chris Gemson

Chris Gemson

Senior Solicitor, Corporate and Commercial

Latest News & Insights

All in a Day’s Work: Employment Podcast Series

Our Employment team bring you a monthly podcast covering all aspects of Employment law for businesses and individuals. You can browse our podcasts below…

Top Legal Insights


Contract Law

Material Breach of Contract

What is a ‘material’ breach of contract by a party to a commercial contract? This is a critical issue regularly considered by the courts. What constitutes a material breach and what are the remedies?

Property Law

Commercial Lease: The Financial impact on Landlord and Tenant

Coronavirus (COVID-19) and the restrictions now in place to control its spread, are having a significant effect on many business sectors.

Divorce and Family Law

Divorce in Lockdown: Can I get some discreet legal advice?

We have spoken to clients who are unfortunately experiencing some family issues, and would like to obtain expert legal advice, yet don’t know how...

Land & Property Dispute

Restrictive Covenants – The Price of Modification

Having identified that your land is burdened by a restrictive covenant and for the purposes of this article the covenant in question will be that only one residential building can be erected on the land. What do you do next?

Wills, Trusts and Probate

Why is having a will so important?

It is entirely up to you if and when you want to create a Will, but it is important to be aware of the consequences of not having a Will.

Award winning legal advice

Herrington Carmichael offers legal advice to UK and International businesses as well as individuals and families. Rated as a ‘Leading Firm 2024’ by the legal directory Legal 500 and listed in The Times ‘Best Law Firms 2023 & 2024’. Herrington Carmichael has offices in London, Farnborough, Reading, and Ascot.

+44 (0)1276 686 222


Brennan House, Farnborough Aerospace Centre Business Park, Farnborough, GU14 6XR

Reading (Appointment only)
The Abbey, Abbey Gardens, Abbey Street, Reading RG1 3BA

Ascot (Appointment only)
102, Berkshire House, 39-51 High Street, Ascot, Berkshire SL5 7HY

London (Appointment only)
60 St Martins Lane, Covent Garden, London WC2N 4JS

Privacy Policy   |   Legal Notices, T&Cs, Complaints Resolution   |   Cookies  |   Client Feedback   |  Diversity Data



Our Services

Corporate Lawyers
Commercial Lawyers
Commercial Property Lawyers
Conveyancing Solicitors
Dispute Resolution Lawyers
Divorce & Family Lawyers
Employment Lawyers
Immigration Law Services
Private Wealth & Inheritance Lawyers
Startups & New Business Lawyers

Pay Online >

Please be aware that we have no plans to change our bank details. If you receive any indication that any of our bank details have changed please contact us before sending us any funds. We take no responsibility for monies you transfer into the wrong bank account.

© 2023 Herrington Carmichael LLP. Registered in England and Wales company number OC322293.

Herrington Carmichael LLP is authorised and regulated by the Solicitors Regulation Authority with registration number 446245.