Unexpected requirements from your lender can feel like a drag.
When you borrow money from a lender, you are technically borrowing from their investors. Lenders have a duty to use their investors’ money responsibly – they won’t be in business long making poorly informed decisions that lose money.
Unlike public companies governed by regulatory bodies imposing standards to protect investors, private companies lack such oversight leaving lenders to their own devices. Lenders’ effort to protect their investors’ capital is executed in two phases: (i) upfront, before they lend you money (underwriting), and (ii) post-close, until they are repaid (oversight).
Notably, the priority and extent of requirements from your lender will vary based on where your company is in its lifecycle (e.g., early vs. growth stage) and the structure of your debt facility (e.g., asset-based vs. cash flow). However, borrowers are well-positioned to accelerate their financing timeline and achieve better outcomes by preparing for what may be expected – included below are some common lender requirements and expectations.
Before lending money to your company, lenders undergo a series of steps to ensure they make a smart, well-informed decision (i.e., should they lend to your company, and, if so, how much and under what terms).
The underwriting process will typically include the following:
- Company diligence (business overview, company ownership, management team, segment information, risk factors, etc.)
- Financial diligence (funding requirements, historical performance, growth & profit drivers, forecasts, etc.)
- (If you do not have audited financials) 3rd-party accounting diligence (i.e., quality of earnings report)
- Business / asset value assessment
- In-person management meeting
- Background, legal and insurance/ other claims check
Lenders seek certain standards that provide safeguards and help them sleep at night. In some instances, they will be codified in your credit agreement. These are rarely extraneous and bring forward things that would typically be implemented as your company grows in size and number of stakeholders.