Step one within the strategy of elevating enterprise debt is a fast, introductory filtering telephone name between you and the potential lender that’s an equal quantity promoting and listening – on either side.
Consider it like a primary date. Ought to that go nicely, it ought to then be adopted up shortly with each events signing an NDA. (VCs don’t wish to signal NDAs, however enterprise debt lenders don’t have an issue with it.)
At this level, we’d begin our preliminary due diligence. We sometimes ask an organization for six issues:
An investor presentation
In case you are searching for funding cash, you in all probability have just lately raised fairness. The investor deck you’ll have used for that works for enterprise debt as nicely. (There are quite a few examples on-line.)
The 409A
The annual valuation of the fairness worth of the corporate, designed to guard staff who’re granted inventory choices in order that they’ll’t later be slapped with a tax for getting “low cost inventory.” Normally these valuations are available in at a degree that makes getting fairness engaging to staff. Don’t fear if the worth assigned by the 409A valuation agency is decrease than what you consider is truthful. We all know how these valuations work and don’t turn into fixated on their valuation.
The 409A will embrace alternative ways of analyzing the worth of the corporate, the identical issues we take a look at: discounted future money circulation; comparables to public corporations; comparables to current M&A. It would additionally give a very good historical past of all of the funding the corporate’s ever gotten, and it all the time features a five-year projection.
An in depth capitalization desk and funding historical past
It will embrace all people who owns any piece of the corporate, a historical past of fundraising and a historical past of any financial institution financing or exterior debt used.
Historic financials
Ideally, we are going to obtain 5 years of historic monetary statements. We might find it irresistible in the event that they have been audited, but it surely’s not mandatory.
Projected financials
For us to do our work, we would like a completely linked, three-statement monetary mannequin. The three statements are: steadiness sheet, revenue assertion, and assertion of money circulation. If there are delays or points within the course of, it’s normally due to a delay in getting linked three-statement projections, which permits us to do “what-if” analyses (resembling: “If issues go worse than deliberate, when do issues break? How a lot does this startup want to cut back their variable bills to stay viable and in a position to service our debt?”).
Every thing I’ve outlined ought to take an estimated 4-5 weeks from our first telephone name. That places it at Week 6 for a signed time period sheet.
Usually we’re lending to corporations that promote to large enterprises, so as a substitute of getting 1,000,000 clients they’ve obtained 100, and we’ll need to perceive how they promote, how predictable their gross sales forecasts are, and the way comfy they’re with the approaching years. All of that helps us choose how a lot we consider of their monetary projections.
A listing of the most important clients, current and previous
Detailed buyer info permits us to determine buyer focus or churn. These might be fast disqualifiers, and we don’t need to waste a whole lot of anybody’s time if that’s the case.
If a possible borrower’s buyer base is simply too concentrated (fewer than 15 complete clients or greater than 50% of revenues from just some clients), that’s too dangerous for us. Or if the startup has a whole lot of churn – which means that their present clients determined they’re not going to resume or stick with them – that’s one other pink flag/doubtless disqualifier. There may be nuance round this, too. In case your product has advanced considerably and in what we’d contemplate a optimistic, logical route, then churn may make sense.
With all this info, we are able to do a desktop evaluation that sometimes takes two weeks. We may do it extra shortly if completely mandatory, however we like to present ourselves two weeks. If the desktop evaluation is optimistic, we’d challenge a time period sheet.
Doing it our means permits us to customise a considerate construction and set of phrases which can be truthful for us and applicable for the borrower. For instance, tailoring the mortgage for the borrower could possibly be round if you really need the cash. Possibly you want it immediately, or maybe it’s a bit additional down the highway.
Different variations may imply structuring the deal so the rate of interest declines as the corporate will get stronger, or having an extended interest- solely interval, the place the debt isn’t amortizing, since you wouldn’t be ready to begin to amortize till a sure occasion happens.
I might estimate that every little thing I’ve outlined above ought to take about 4 to 5 weeks from our first telephone name. Meaning you’d in all probability have a time period sheet by Week 5.
Going to the board
Up till now you’d in all probability solely have the CEO and CFO concerned. When you get a time period sheet, you’d need to current the deal to the board.
Some corporations can have their board concerned from the start of the method. I’ve recognized of offers that obtained derailed as a result of a board member didn’t need to do a cope with a selected lender. It could possibly be a private (and one-sided) beef; it could possibly be {that a} board member is aware of one thing particular in regards to the lender. This has by no means occurred to us, which is why I recommend at the least letting your board know what lenders you’re speaking to early within the course of.
How shortly issues transfer from the board presentation step depends upon the borrower. They’ll doubtless be trying over time period sheets from totally different lenders. I might guess 10% of the time we’re the one lender concerned. The opposite 90% of the time there are a number of lenders pitching to supply progress capital. The corporate might also be contemplating utilizing some or all fairness to fulfill their wants.
If there are three or 4 time period sheets to work by way of and examine, you’ll in all probability take a few week to get by way of these. Whereas a deal itself could also be comparatively simple, that doesn’t imply that each deal would be the identical. Not solely do lenders differ relating to the stage at which they’ll lend cash, however some may also specialize by trade. Phrases will, in fact, fluctuate from lender to lender.