Step one within the technique 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 each side.
Consider it like a primary date. Ought to that go nicely, it ought to then be adopted up rapidly with each events signing an NDA. (VCs don’t prefer to signal NDAs, however enterprise debt lenders don’t have an issue with it.)
At this level, we might begin our preliminary due diligence. We usually ask an organization for six issues:
An investor presentation
If you’re on the lookout for funding cash, you most likely have 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 workers who’re granted inventory choices in order that they will’t later be slapped with a tax for getting “low cost inventory.” Often these valuations are available in at a degree that makes getting fairness enticing to workers. Don’t fear if the worth assigned by the 409A valuation agency is decrease than what you consider is honest. We all know how these valuations work and don’t turn out to be fixated on their valuation.
The 409A will embody alternative ways of analyzing the worth of the corporate, the identical issues we have a look at: discounted future money circulation; comparables to public corporations; comparables to current M&A. It can additionally give a extremely 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
This may embody 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 had been audited, nevertheless it’s not mandatory.
Projected financials
For us to do our work, we wish a completely linked, three-statement monetary mannequin. The three statements are: stability sheet, revenue assertion, and assertion of money circulation. If there are delays or points within the course of, it’s often due to a delay in getting linked three-statement projections, which permits us to do “what-if” analyses (comparable to: “If issues go worse than deliberate, when do issues break? How a lot does this startup want to scale back their variable bills to stay viable and capable of service our debt?”).
The whole lot 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 massive enterprises, so as a substitute of getting 1,000,000 prospects they’ve received 100, and we’ll wish to perceive how they promote, how predictable their gross sales forecasts are, and the way snug they’re with the approaching years. All of that helps us choose how a lot we consider of their monetary projections.
An inventory of the biggest prospects, current and previous
Detailed buyer info permits us to determine buyer focus or churn. These will be fast disqualifiers, and we don’t wish to waste numerous anybody’s time if that’s the case.
If a possible borrower’s buyer base is simply too concentrated (fewer than 15 whole prospects or greater than 50% of revenues from only a few prospects), that’s too dangerous for us. Or if the startup has numerous churn – which means that their current prospects determined they’re not going to resume or stick with them – that’s one other purple flag/probably disqualifier. There’s nuance round this, too. In case your product has developed considerably and in what we might think about a optimistic, logical path, then churn might make sense.
With all this info, we will do a desktop evaluation that usually takes two weeks. We might do it extra rapidly if completely mandatory, however we like to present ourselves two weeks. If the desktop evaluation is optimistic, we might problem a time period sheet.
Doing it our method permits us to customise a considerate construction and set of phrases which can be honest for us and acceptable for the borrower. For instance, tailoring the mortgage for the borrower might be round while you really need the cash. Possibly you want it straight away, or maybe it’s somewhat additional down the highway.
Different variations might 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 able to begin to amortize till a sure occasion happens.
I might estimate that every thing I’ve outlined above ought to take about 4 to 5 weeks from our first telephone name. Meaning you’d most likely have a time period sheet by Week 5.
Going to the board
Up till now you’d most likely solely have the CEO and CFO concerned. When you get a time period sheet, you’d wish to current the deal to the board.
Some corporations can have their board concerned from the start of the method. I’ve identified of offers that received derailed as a result of a board member didn’t wish to do a take care of a selected lender. It might be a private (and one-sided) beef; it might 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 counsel not less than letting your board know what lenders you’re speaking to early within the course of.
How rapidly issues transfer from the board presentation step will depend on the borrower. They’ll probably be trying over time period sheets from completely 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 offer progress capital. The corporate might also be contemplating utilizing some or all fairness to satisfy their wants.
If there are three or 4 time period sheets to work by means of and evaluate, you’ll most likely take a few week to get by means of these. Whereas a deal itself could also be comparatively easy, that doesn’t imply that each deal would be the similar. Not solely do lenders differ relating to the stage at which they are going to lend cash, however some may even specialize by business. Phrases will, in fact, differ from lender to lender.