Debt Financing for CFOs – Part 1

CFOs are tasked with balancing growth, risk, profitability and leverage. And when using leverage, whether you’re using it to expand operations, invest in new projects, or to refinance existing debt, deciding where to get financing is a major decision.   

Do you use a bank, life insurance companies, or public debt markets? Or do you go the non-traditional route?  

Today, in part 1 of 2 in our debt series, we’ll dive into our real-world experience working with banks and other lending institutions.   

We’ll also offer some insights into why you’d use each channel and the pros and cons.  

This will discuss these points at an introductory level for this 2-part series. In the future, we'll discuss these in more detail. And we'll talk about alternative sources of financing. 

The Main Players: Banks vs. Life Insurance Companies  

When your company need debt financing most CFOs think first of banks. These are your traditional banks like you see on the corner with branches. It’s a natural reflex since banks have long been the traditional go-to for financing for many businesses.   

But as experienced CFOs know, banks are only one piece of the puzzle. Which one is the best fit might come down to how flexibility you need. What are your requirements for fixed vs. variable rates, guarantees? What about debt service coverage ratios and term? Depending on your company’s needs, other sources like life insurance companies, can offer financing options that better align with long-term strategies or specific debt structures.  

Banks: Banks offer a wide range of loans—everything from working capital lines of credit to long-term fixed-rate loans. Banks are ideal for shorter-term or floating-rate loans. They're also willing to negotiate for longer terms, depending on your relationship and collateral.  

Life Insurance Companies: In contrast, life insurance companies provide long-term, fixed-rate financing, typically for commercial real estate or infrastructure projects. These lenders focus on stability, and they’re generally looking for low-risk, stable assets that generate steady cash flows.  

Why You’d Use Each Channel  

When to Use Banks  

Banks are usually our first stop for financing. They can be the most flexible (at times) and generally have the ability to handle a broad range of borrowing needs. Below are some key reasons why you’d use a bank for financing:  

1. Short-Term Capital Needs: Banks are ideal for short-term borrowing, especially if your company is in growth mode. Need to finance a rapid expansion or cover operational cash flow gaps? A revolving line of credit can help smooth out the bumps.  

2. Floating Interest Rates: If you believe rates are going to decline or remain stable, banks offer loans with variable interest rates that can potentially save you money. Floating-rate loans can also be refinanced if rates drop, giving you flexibility.   

Just a note that they can do fixed rate, too, but they are often higher than you can get elsewhere.    

There are also other things you can do such as buying a swap to fix the rate...but we’ll get into those details in future articles.  

3. Existing Relationships: The relationship factor is critical in bank financing. If you’ve built a strong history with your bank—providing clear financials, keeping open communication, and showing profitability—they may offer favorable terms. They can usually move fairly quickly in those cases as well. Banks value trust and long-term relationships.  

4. General Corporate Loans: Banks are often better for financing broader business operations beyond specific projects. From financing real estate purchases to securing general corporate loans, banks are the workhorses of debt financing.  

As a CFO, we've learned that relationship banking pays dividends. Build that trust with regular check-ins, clear reporting, and consistent cash flow management. It’s easier to negotiate favorable terms with a banker who knows your business and trusts your numbers.  

When to Use Life Insurance Companies  

Life insurance companies are more focused on long-term, fixed-rate loans that they match to the duration of their investments. Often, they are used in real estate and infrastructure financing, but they’re gaining traction in other capital-intensive sectors.  

1. Project-Based Financing: If you’re financing a real estate or infrastructure project, life insurance companies can often provide better terms than banks. They’re typically willing to offer higher loan-to-value (LTV) ratios for these types of projects, which can reduce the amount of equity your company has to put into a deal.  

2. Long-Term Fixed-Rate Loans: Life insurance companies are the best option if you’re looking to lock in financing for 15, 20, or even 30 years. Their long investment horizon matches long-lived assets, such as real estate, energy infrastructure, or large capital projects. You can secure fixed rates over decades, which can be an invaluable hedge against rising interest rates.  

3. Lower Interest Rates: Life insurance companies tend to have lower interest rates compared to banks because they’re managing policyholder funds over long periods and want predictable returns. If your company qualifies, you might be able to secure rates 50 to 100 basis points below what a bank would offer.  

     

4. Stability and Low Risk: If your company is in a stable industry with solid long-term assets, life insurance companies can offer better rates than banks because they’re looking for low-risk, high-stability projects. They’re risk-averse, so if you can show stable cash flow tied to long-lived assets, this is an excellent option.  

We’ve seen many CFOs overlook life insurance companies because they assume they’re only for large-scale projects or real estate deals.

Not true.

If your business has long-lived assets and stable cash flows, don’t ignore this option. Life insurance companies tend to offer more attractive fixed rates.

And if you’re concerned about interest rate hikes, this could be a lifesaver. If rates are dropping though, you might want to go a more flexible route.   

Pros and Cons of Each Channel  

Bank Financing: Pros  

• Flexibility: Usually have a wider variety of loan structures, from short-term working capital lines to multi-year loans.  

• Quick Access to Capital: Banks tend to move faster than institutional lenders like life insurance companies.  

    

• Existing Relationships: If you’re doing your job right, you have established relationships with multiple banks. It can’t be overstated how much easier this makes the negotiation process.  

• Breadth of Offerings: They offer treasury management services, cash flow management, and other financial products that might be bundled with loans. This can also be a con because they might be pushing for deposits and other services you already have parked elsewhere.  

Bank Financing: Cons  

• Shorter Loan Terms: While banks can offer long-term financing, the terms generally don’t extend beyond 10 years since they don’t want it parked on their balance sheet that long.  

• Variable Rates: Bank loans often come with variable interest rates, which can be a risk if rates rise sharply. As mentioned earlier though, you they do have fixed rate options too (often higher than you get elsewhere) and you can put a swap in place to fix the rate.  

    

• Covenant-Heavy Loans: Banks are more likely to impose financial covenants, requiring certain debt-to-equity ratios, DSCR, EBITDA, or interest coverage ratios. These covenants can tighten access to cash when you need it most.  

In 2020, Delta Airlines secured a $2.6 billion syndicated loan to weather the COVID-19 crisis. It came with stringent covenants though. Delta had to maintain a minimum level of liquidity and cap its leverage. These terms limited their operational flexibility during the downturn.  

Life Insurance Company Financing: Pros  

• Longer Loan Terms: Life insurance companies are ideal for securing long-term, fixed-rate debt, often spanning 15-30 years.  

    

• Lower Rates for Stable Assets: If you can show low risk, the rates offered by life insurance companies tend to be lower than banks.  

    

• Less Volatile Interest Rates: Fixed-rate loans from life insurers are more predictable, protecting against interest rate increases.  

Life Insurance Company Financing: Cons  

• Limited Flexibility: Life insurance companies are typically only interested in stable, cash-generating assets like commercial real estate or infrastructure. They are less likely to finance a general corporate loan or working capital.  

    

• Slower Process: Underwriting loans through a life insurance company can be slower and more cumbersome, especially if the project doesn’t fit neatly into their risk profile.  

    

• Collateral Requirements: Life insurance companies prefer financing projects with a specific asset that can serve as collateral, making it less flexible if you need unsecured loans or more general corporate borrowing.  

Handling Thorny Subjects  

Profitability Expectations  

When negotiating debt, lenders are laser-focused on one thing. Your ability to repay the loan. This means they’ll scrutinize your profitability metrics like EBITDA, net profit margins. They’ll want multiple years of audited financials and will want to see some forecasts.  

The key is to manage lender expectations while being realistic about your financials.   

Don’t sugarcoat potential pitfalls. Acknowledge risks and show how you plan to mitigate them.   

When times are good, lenders tend to be lenient. But when cash flow dips, they’ll point back to the projections you sold them on.  

If profitability is in flux, consider asking for covenant-lite loans. These loans reduce the number of restrictive covenants you must follow, giving your company breathing room during downturns. But you must be ready to explain how your company plans to bounce back or improve profitability.  

Conclusion

Debt financing is both an art and a science. As CFOs, we must balance risk and reward, growth and stability, and profitability and leverage. Banks, life insurance companies, and other lenders each offer unique advantages depending on your company’s needs, industry, and financial health.  

• Use banks for short-term, flexible financing and when strong relationships can lead to favorable terms.  

• Consider life insurance companies for long-term, stable financing, particularly when rates are low and you’re managing long-lived assets.  

• Always manage profitability expectations and keep a close eye on your debt loads, ensuring you’re not over-leveraging during growth periods.  

At the end of the day, your role as CFO is to manage these financial relationships and make sure that debt works for you, not against you. Whether you’re negotiating covenants, managing refinancing risks, or deciding between fixed and floating rates, your goal is to create a debt structure that supports growth, minimizes risk, and maximizes long-term profitability.  

Next Week

That’s all for this week.   

Join us next week for Part 2 of this series where we’ll discuss managing debt loads, preparing for downturns, and more.   

There is a lot to this topic! We could easily spend the rest of our weekly letters this year diving even more in depth on this, but we’ll wrap this series up and then discuss other areas in the future. Hope everyone has a great week!