By Sankeetha Selvarajah​

Today's issue is brought to you by Zensei LLC. We help high achieving entrepreneurs get clear on their growth by planning their exits in a mindful, systematic process. Included: LOTUS reference guide covering 15 Debt types, best debt type by company stage, and how a potential Buyer is likely to view it during Due Diligence (DD).

GUIDE: Strategically use Debt to scale your company. 15 Debt types Buyer perception, and Apocalypse Modeling.

Before we dive into our Annual Summer Series (July/August editions), let’s flirt with Debt, first.

Dear Exiter,

There’s more to the funding spectrum than “Bootstrapping” and “Venture-Funded”, when scaling requires immediate cash.

The other option is to take on debt.

However, taking on funding that has to eventually be paid back, isn’t that sexy at all.

CEOs have been wary of using debt (myself included), due to being conservative or just simply unaware of other possibilities.

(Obviously, it is NOT generally recommended to take on debt to pay down ANOTHER debt source).

Let’s dive in.

Table of Contents:

1. Buyer’s perception of debt and Framework
2. 15 types of Debt categorized by company stage
3. Service Providers to consult
4. Apocalypse Modeling

A. How the Buyer Perceives Debt:

As with any Lotus exercise, we recommend thinking like the Buyer, first.

Remember these points:

• Buyers want to buy as little liability as possible.
• Buyers don’t buy potential headaches or unclear inheritances.
• Buyers don’t buy where confusion lives.
• Buyers don’t buy when the debt is bigger than the assets.

Use these Levers: Will my potential Buyer be confused and/or be burdened by this debt? Will my Exit price go down because of this debt?

The Buyer’s Perception Framework:

Regardless of debt type (see below list), Buyers tend to evaluate debt through these lenses during Due Diligence:

1. Cost to retire or END the debt before their ownership begins – Is there a prepayment penalty or change-of-control trigger that makes it expensive to pay it off on the exit date?
2. Capitalization table complexity. – Does the debt carry warrants (reservation rights) or conversion rights that dilute the buyer's ownership post-close? Does it act like a greedy “investor” on the equity table?
3. What it signals. What’s the real story behind the debt “need”? – Was this debt a normal growth tool, or evidence the company needed emergency cash?
4. Asset encumbrance. What else is tied up? – Are specific assets pledged as collateral, requiring lien releases before clean transfer?

B. 15 Types of Debt:

Early-Stage (pre-revenue to early revenue, limited collateral)

1. Convertible Notes

Best fit: Ideal for pre-seed/seed companies that need cash now but aren't ready to set a valuation.

Buyer perception: Seen as cap table risk. If notes haven't converted by the time of acquisition, the buyer has to negotiate settlement terms with noteholders, which can complicate or delay a deal.

2. Venture Debt

Best fit: Fits just after a seed or Series A, when there's institutional VC backing but not yet steady cash flow.

Buyer perception: Warrants from the investor attached mean dilution a buyer has to account for. Many venture debt agreements also have change-of-control clauses that trigger repayment or require lender consent before a sale can close.

3. Bridge Loans

Best fit: Useful for any early company needing to cover a gap until the next round closes.

Buyer perception: Often read as a signal the company needed emergency capital, prompting closer scrutiny of why. Even if the reason was benign (timing gap before a round), it invites extra diligence questions.

4. SBA Loans

Best fit: Best for small, non-VC-backed businesses (often outside tech) needing affordable capital without giving up equity.

Buyer perception: Seen as low-risk, but buyers will check for personal guarantees that need releasing and restrictions on change of ownership, since SBA loans often aren't easily assumable.

5. Trade Credit

Best fit: Accessible to almost any early company with supplier relationships; doesn't require credit history.

Buyer perception: Generally viewed as routine and not really "debt" in a buyer's risk model, unless payment terms have been stretched well past normal, which would flag cash flow stress.

Growth/Mid-Stage (revenue-generating, scaling operations)

6. Bank Term Loans

Best fit: Suits companies with consistent revenue and some profitability track record.

Buyer perception: Straightforward for buyers to underwrite; they know exactly what's owed and can plan to pay it off or refinance at close. Covenants might require lender sign-off on the sale, adding a step but rarely a dealbreaker.

7. Revolving Credit Lines

Best fit: Good for growth-stage companies managing seasonal or uneven cash flow.

Buyer perception: Treated as normal working capital and typically just refinanced post-close. Low concern unless usage is consistently maxed out, which can suggest tight cash flow.

8. Revenue-Based Financing

Best fit: Fits SaaS/e-commerce companies with predictable recurring revenue but who want to avoid dilution.

Buyer perception: Buyers tend to be less familiar with this structure, so it gets extra scrutiny. The repayment tied to revenue means post-acquisition integration can be messier if the buyer plans to change the revenue model.

9. Invoice Factoring

Best fit: Best for B2B companies scaling with long customer payment cycles (e.g., 60–90 day terms).

Buyer perception: Can raise a flag depending on context: if it's used as a deliberate cash-flow tool, it's fine; if it looks like the only way the company stayed liquid, buyers will dig into why. Also affects valuation since the receivables are already sold and not part of what's being acquired.

10. Equipment Financing/Leasing

Best fit: Suits capital-intensive growth companies (manufacturing, logistics, healthcare) buying physical assets.

Buyer perception: Viewed as routine and easy to evaluate since it's tied to a specific, valuable asset. Usually just assumed by the buyer or paid off at close without much friction.

Late-Stage/Mature (established, asset-rich, or pre-IPO)

11. Mezzanine Debt

Best fit: Common in late-stage buyouts, acquisitions, or pre-IPO recapitalizations.

Buyer perception: Expensive to retire, especially if it includes an equity kicker or warrants. Often signals the company went through a leveraged event (buyout, recap) and adds complexity to unwinding the cap table.

12. Asset-Based Lending

Best fit: Fits mature companies with significant inventory or receivables to pledge as collateral.

Buyer perception: Buyers need to identify exactly which assets are pledged and ensure liens are released at close. Generally manageable, but it does narrow what's "free and clear" in the deal.

13. Corporate Bonds

Best fit: Reserved for large, established companies (often public) with credit ratings and big capital needs.

Buyer perception: A bigger deal to navigate. These often have change-of-control "make-whole" provisions that can trigger costly early repayment, common in large PE-backed transactions, so buyers price this in carefully.

14. Sale-Leaseback

Best fit: Works for mature companies that own real estate or major equipment and want to unlock that capital.

Buyer perception: Buyers note that real estate or major equipment isn't actually part of the acquisition — they're inheriting a lease obligation instead of an owned asset, which affects how they model EBITDA and future flexibility.

15. Commercial Paper

Best fit: Only available to large, highly creditworthy companies covering short-term operating needs.

Buyer perception: Seen as a positive signal since only highly creditworthy companies can issue it. Buyers treat it as routine, short-term, and easily rolled over or paid off.

C. Service Providers to Consult:

Always, always, always review all debt arrangements with your:

1. CFO - To correlate your numbers & story;
2. Attorney - To review your debt documents and to advise on risks/obligations;
3. Accountant - To understand how your payment and your debt will be categorized per year.

D. Run APOCALYPSE Modeling Scenarios:

Think of Debt as another “investor” or “owner” on your equity capitalization table (“Cap Table”).

Every time you engage in debt obligations, run an exit modeling scenario FIRST. Then, consult with your providers above.

1. Does this debt allow me to achieve my Exit Plan, sooner or later?
2. Who are the Debt players? List every single lender…and every subrogation.
3. Think of EVERY SINGLE “WHAT IF?” scenario and how your debt changes.
   1. What happens if: your company goes bankrupt? Dissolves?
   2. You (the principal owner) die? How does the debt transfer?
   3. Can I assign this debt to a potential buyer? Without the lender’s consent?
4. How much will I have to pay off BEFORE I sell my company for $X or by Y date?
5. How will I explain this to a potential Buyer?

In strategic succession,

Sankeetha

When you’re aligned, here are the best ways we can help you:

1. Our Zensei 4 week Group Accelerator is now OPEN for our September 2026 cohort. At half the cost of an individual Exit Plan, this allows you to co-create a 2 year Exit Plan for this calendar year and beyond. Taking a cohort maximum of 6. Every Exiter has a private, 2 hour Exit meeting at the end of the Accelerator and a complimentary 30 day followup. Sign up for a free discovery call here to learn more. ​​

2. ​Initial Exit Strategy Session. Unsure of where to begin? Allow an Exit Strategist to review your current status and give you Actionable tips to begin your Exit journey. Sign up here.​

3. "Exit Ready Audit" Thinking about exit in 2 years? Having a preemptive review of your Company through a potential Buyer's lens will unearth issues and allow you to course-correct early. Sign up for a discovery call here.​

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