Strategic Alternatives to Traditional Debt Financing

As we progress through 2025, middle market companies face an interesting capital environment. While interest rates have stabilized from their peaks, they remain historically elevated, impacting the cost and availability of traditional debt financing. Simultaneously, we're seeing unprecedented innovation in capital structure alternatives that provide growth funding without the constraints of conventional bank loans.

For growth-oriented middle market businesses, understanding these alternatives has become a strategic imperative. This article examines five increasingly popular capital solutions that offer flexibility, strategic alignment, and potentially more favorable economics than traditional debt.

1. Revenue-Based Financing: Growth Capital Aligned with Business Performance

Revenue-based financing (RBF) has evolved significantly from its origins in the software industry to become a viable alternative for companies across multiple sectors with strong recurring revenue components.

How it works: Capital providers advance funds in exchange for a percentage of future revenues until they receive a predetermined return (typically 1.5x to 2.5x the original investment). Monthly payments flex with revenue performance rather than requiring fixed payments regardless of business conditions.

Ideal candidates: Companies with:

• Predictable, recurring revenue streams

• Gross margins of 50%+ to accommodate the revenue share

• Demonstrable growth opportunities requiring capital

• Limited hard assets for traditional collateral

Notable benefits:

• No equity dilution or personal guarantees

• Payment flexibility during slower periods

• No covenants related to EBITDA or other financial metrics

• Faster funding timeline than traditional debt (often 4-6 weeks)

Case example: A business services client with $8.5M in annual recurring revenue secured $3M in RBF to fund geographic expansion. The financing required a 9% revenue share until reaching a 1.8x return ($5.4M total repayment). This structure allowed them to expand to three new markets without diluting equity or taking on fixed debt obligations during their growth phase.

2. Equipment-as-a-Service (EaaS): Transforming CapEx to OpEx

For manufacturing, distribution, and logistics companies, equipment costs often represent significant capital expenditures that tie up debt capacity. EaaS models provide an alternative that preserves capital while still enabling operational improvements.

How it works: Instead of purchasing equipment outright, companies pay a monthly fee that includes the equipment, maintenance, upgrades, and sometimes related software. More sophisticated providers build performance guarantees or output-based pricing into their models.

Ideal candidates: Companies:

• Requiring equipment upgrades to improve efficiency

• Wanting to preserve debt capacity for other strategic initiatives

• In industries where technology changes rapidly

• Looking to align equipment costs with production volumes

Notable benefits:

• Preservation of cash and debt capacity

• Regular technology refreshes without new capital outlays

• Maintenance and downtime risk transferred to provider

• Potential tax advantages from operating vs. capital expenses

Case example: A specialty electronics manufacturer needed $2.5M in new production equipment to meet growing demand but had recently used much of its debt capacity for an acquisition. They implemented an EaaS solution that improved production capacity by 35% while preserving capital for inventory expansion to support growth.

3. Structured Equity: Bridging the Gap Between Debt and Traditional Equity

Structured equity instruments – including preferred equity, convertible notes, and similar hybrid securities – have moved from the realm of late-stage venture capital into the mainstream middle market.

How it works: These instruments typically combine characteristics of both debt and equity, featuring:

• Regular dividend/interest payments (often with PIK options)

• Liquidation preferences ahead of common equity

• Governance rights typically more limited than common equity

• Conversion or exit mechanisms defined at investment

Ideal candidates: Companies:

• With strong growth but limited current cash flow for debt service

• Seeking capital for acquisitions or major expansion initiatives

• Where owners want to maintain operational control

• Planning for a significant liquidity event in 3-5 years

Notable benefits:

• Lower cash burden than traditional debt

• Less dilution than common equity

• More flexible terms than standard bank financing

• Often requires less rigorous covenants than senior debt

Case example: A healthcare services provider raised $7M in preferred equity to fund the acquisition of a complementary business. The structure included a 7% current dividend, 3% PIK component, and 1x liquidation preference, allowing the company to complete a strategic acquisition without straining cash flow during the integration period.

4. Strategic Corporate Partnerships: Beyond Traditional Venture Financing

Corporate strategic partnerships, once primarily the domain of early-stage companies, have evolved into sophisticated financing vehicles for established middle market businesses.

How it works: A corporate partner provides capital (debt, equity, or hybrid) combined with strategic value through:

• Market access or customer introductions

• Technology or operational expertise

• Supply chain integration or preferred vendor status

• Co-development opportunities

Ideal candidates: Companies with:

• Products or services complementary to larger corporations

• Innovative technology or business models with broader application

• Expansion goals aligned with strategic partners' objectives

• Preference for partners bringing more than just capital

Notable benefits:

• Often more patient capital than financial investors

• Strategic value beyond the financial investment

• Potential for follow-on business relationships

• Validation from established industry players

Case example: A manufacturing technology company secured $5M in growth capital from the venture arm of a global industrial corporation. Beyond the capital, the strategic partnership provided access to the corporation's international customer base, accelerating the company's expansion timeline by an estimated 18-24 months.

5. Asset-Based Finance Evolution: Beyond Traditional Receivables and Inventory

Asset-based lending has evolved significantly beyond traditional receivables and inventory financing to include innovative structures based on a wider range of business assets.

How it works: These specialized financing solutions are secured by specific business assets such as:

• Intellectual property and patent portfolios

• Equipment with monitoring technology enabling real-time utilization data

• Software subscriptions and recurring contract value

• Customer usage metrics or consumption patterns

Ideal candidates: Companies with:

• Valuable assets not well-suited to traditional bank financing

• Lumpy or seasonal cash flows

• Strong underlying assets but limited EBITDA history

• Specific financing needs tied to particular assets or divisions

Notable benefits:

• Often available to companies that don't qualify for traditional debt

• Typically non-dilutive to equity holders

• More flexible structures than conventional asset-based loans

• Can be implemented at the asset level rather than company-wide

Case example: A technology services provider with $12M in annual recurring revenue but minimal EBITDA secured $4M against their subscription contract value. This financing allowed them to fund sales team expansion without diluting equity during a high-growth phase, with the financing designed to amortize in alignment with the typical customer lifecycle.

Strategic Implementation: Making Alternative Financing Work for Your Business

Successfully implementing these alternative financing strategies requires a thoughtful approach:

1. Align Financing with Growth Strategy: The optimal financing solution should directly support your strategic objectives rather than simply providing available capital. Begin with your growth plan, then identify the financial structure best suited to support it.

2. Consider the Full Economic Impact: Look beyond simple interest rate comparisons to evaluate the total cost of capital, including origination fees, ongoing compliance costs, and potential dilution or revenue sharing implications.

3. Evaluate Partner Alignment: For structures involving strategic partners or specialized capital providers, assess their industry experience, typical investment horizons, and track record with similar companies.

4. Plan for Future Capital Needs: Consider how today's financing choices will impact your ability to access additional capital in the future, particularly if you anticipate multiple growth phases requiring incremental funding.

5. Create Competitive Tension: Even when pursuing alternative financing, engaging multiple potential providers creates leverage to improve terms and identify the best partner fit.

Conclusion

The evolution of capital alternatives represents a significant opportunity for middle market companies to fund growth more strategically and flexibly than ever before. By understanding these options and thoughtfully matching them to your specific business objectives, you can secure growth capital that provides both financial resources and strategic advantages.

At Summit Capital Partners, we help clients navigate these complex financing alternatives, leveraging our relationships across traditional and alternative capital providers to structure solutions optimized for each company's unique circumstances and objectives.