Professional Comment

Debt Financing and Social Care

By Rachel Emmerson (left) and Abbey Watkins (right), accountants at Kreston Reeves (

Debt financing in the social care sector has come under considerable scrutiny over the past decade, thanks in part to the influx of private equity funders and the collapse of Southern Cross in 2012. Despite this, Abbey Watkins and Rachel Emmerson, accountants at Kreston Reeves, say not all debt is bad.

The demand for nursing and residential care is increasing, with the need for beds outstripping supply. A recent survey by Knight Frank highlights the scale of the challenge facing the sector, predicting that over the next decade there will be a shortfall of 58,000 beds.

Independently owned and managed residential care homes are well-placed to pick up some of that shortfall but will need to invest to do so. With funding squeezed and cash reserves tight, that may leave care providers with little choice but to explore funding growth through debt.

Debt does, however, have negative connotations and is seen by many business owners as something to be avoided. But there is both good and bad debt.

Debt borrowing that exists simply to help the business survive is unlikely to be contributing to the future growth or success of a care business. Whilst it may be needed, it will also be a drag on growth and may not be a sensible option.

Good debt, however, is borrowing that is used to invest in the future growth of the business. As long as it continues to provide those foundations for growth, exploring debt should not be feared. Contrary to what care businesses may read, banks and other investors are willing to lend to care businesses with strong growth plans.

Lenders will expect businesses to be able to demonstrate, amongst other things, an understanding of their current borrowing and how that will impact the ability to repay future borrowing. They will also want a clear and compelling proposal from that business on how funding will be used to contribute towards growth.

Importantly, independent care providers will need to plan ahead, and that will require forecasting when funding is most likely to be needed. It should be remembered that funding may not be needed all in one tranche but drawn down as and when needed.

It is also important to remember that debt financing is a corporate transaction, meaning that it is there for the benefit of both parties.

Put bluntly, debt finance must work for the lender just as much as it must work for the business, meaning that not all borrowing requests will be granted.

It may sound cliched, but people do lend to people. We see that in the rise of the challenger banks who will often lend where traditional banks will not. Relationships, of course, are not built in a 30-minute meeting, so invest time in ensuring your lender understands your vision and plans for the future.

Banks are in most instances the first place most care providers turn to when looking for borrowing. In almost all cases, a bank will ask for a personal guarantee. Whilst uncomfortable for many business owners they are unavoidable. A blended debt financing approach could be explored.

There are an increasing number of debt financing options open to care providers from alternative lenders through to grants. In Kent, for example, Kent County Council is offering an interest-free loan to fund capital investment and growth projects. Whilst these schemes will often require match-funding or come with a demonstratable job creation requirement, they can offer a valuable way to reduce bank funding.
Care businesses should always take specialist and independent advice based on their own specific situation before considering which lender to approach for borrowing or taking external investment.

Rachel Emmerson is a Partner and Abbey Watkins an Accountant in the Funding Team at Kreston Reeves. Kreston Reeves offers accountancy, tax and business advice to a wide range of clients.