Debt finance

Debt finance is money that an organisation borrows and agrees to repay over time, usually with interest. It is one of the main ways organisations raise capital to start, grow, or sustain their operations.

In practice, debt finance can come in several forms. The most common is a term loan, where a lender provides a lump sum that is repaid in regular instalments over an agreed period. There are also lines of credit, which work like an overdraft and allow an organisation to draw on funds up to a set limit as needed. Some lenders offer concessional loans, which charge a lower interest rate than the market rate in recognition of the social or environmental purpose of the borrower. Debt finance is different from a grant because it must be repaid. It is also different from equity investment because the lender does not take ownership in the organisation in exchange for the funds.

In Australia, social enterprises seeking debt finance have a growing range of options beyond traditional banks. Community development finance institutions, such as the Social Enterprise Finance Australia (SEFA), specialise in lending to purpose-driven organisations that may not meet the criteria of mainstream lenders. Philanthropic foundations are also increasingly offering low-interest loans alongside grants. For social enterprises delivering services under government contracts, particularly in areas such as disability support, aged care, or employment services, debt finance can help bridge the gap between when costs are incurred and when payments arrive. This is sometimes called working capital finance, and it can be critical for organisations managing the cash flow pressures that come with government-funded contracts.

There are important risks to understand before taking on debt. Borrowed money must be repaid regardless of whether revenue targets are met. For social enterprises with variable or uncertain income, this can create real financial pressure. Interest costs also reduce the funds available for mission-related activity. Before taking on debt, organisations should carefully assess their ability to service the loan over its full term, and ensure the repayment schedule is realistic given their revenue projections. It is also worth checking whether taking on debt could affect eligibility for certain grants or government funding, as some programmes have restrictions on organisations that carry commercial liabilities.