How getting ahead of lender expectations pre-empts underwriting concerns,
avoids process lag and prevents post-close headaches.

‎ ‎ ‎ ‎ ‎ ‎ Unexpected requirements from your lender can feel like a drag.

Institutional expectations

‎ ‎ ‎ ‎ ‎ ‎ 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.

Upfront underwriting

‎ ‎ ‎ ‎ ‎ ‎ 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

Post-close oversight

‎ ‎ ‎ ‎ ‎ ‎ 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.

‎ ‎ ‎ ‎ ‎ ‎ The below checklist highlights some of the items lenders look for:

Leadership team

‎ ‎ ‎ ‎ ‎ ‎ Post-close, the frequency of communication with your lender will decrease. Executive-level expertise and oversight, such as a full-time CFO, make your lender comfortable that their investors’ money is in good hands.

  • Dedicated department management
  • Company- / industry-tenured leadership

Financial controls and monitoring

‎ ‎ ‎ ‎ ‎ ‎ Consistent and reliable financial information is crucial for lenders to gain confidence in the information used to evaluate your company’s health and good standing.

  • Three-statement reporting (P&L, Balance Sheet & Cash Flow Statement)
  • Tracking and evaluation of key performance indicators (KPIs)
  • Consistent reporting cadence (e.g., monthly)
  • Budget creation and performance comparison
  • Annual CPA-reviewed / audited financials (GAAP)

Systems and processes

‎ ‎ ‎ ‎ ‎ ‎ The complexity and breadth of day-to-day business activities will increase as your company continues to scale – systems and processes help instill confidence in your ability to grow without interruption.

  • Centralized business tracking and oversight (e.g., enterprise resource planning (ERP) software, etc.)
  • Operating policies and procedures (e.g., best practices, employee onboarding, IT management, etc.)
  • Compliance policies and guidelines for regional / industry regulatory and legal requirements

Clean organizational structure

‎ ‎ ‎ ‎ ‎ ‎ It’s not uncommon for a growing business to be personally intertwined with management from the outset. However, with investors’ capital in play, lenders expect a “clean” set of books and organizational structure to track where money is coming and going.

  • Defined legal organizational structure and connection between operating entities
  • Separation and settlement of personal expenses / loans

Getting your ducks in a row

‎ ‎ ‎ ‎ ‎ ‎ Raising money comes with responsibilities. By preparing ahead of time, borrowers can front-run process requirements to accelerate their financing timeline and instill confidence in their lenders to position themselves for better outcomes.

  1. Get a head start. These things will take time to put in place – i.e., don’t wait until you need monthly three-statement reporting to get the systems and processes in place. Delaying after you’ve signed a credit agreement may put you in covenant breach.
  2. Don’t show up empty-handed. Approach your lender with the information you know they will need that you have available to help accelerate the process (for a starting point, see our UW information checklist)
  3. Help them help you. Lending decisions and terms often reflect the lender’s perceived risk. By front-running expectations and showing up prepared, borrowers can give their lenders confidence and help optimize outcomes for both sides.