Using business credit to fund growth initiatives enables startups to grow faster while avoiding dilution of ownership. Business credit is a good way for startups to finance sales, marketing, and hiring to accelerate revenue growth, as well as fund working capital and extend cash runway.
However, we often see startups stumble when they pitch for credit financing. While they may have been successful in obtaining equity investment, lenders look for different things in a business.
How to make your best case to a lender
First – Prepare your financial information
Profit and loss (P&L), balance sheet, and cash flow. Understand what type of credit facility you need, how much you’re looking for, and when. Lenders focus on a company’s financials and want to understand its key metrics, and how the company compares to its competitors so lenders can feel confident the company will continue to grow revenue and be able to repay the credit over the term.
Second – Research lenders
There are many different types of lenders according to your sector, stage, location, and need. Some lenders offer credit to both profitable and not-yet profitable VC-backed companies, while others will only lend to profitable companies. Some lenders offer long-term loans with 3-4 year repayment terms and covenants, while others will only offer lines of credit with 12-month repayment terms. All will offer slightly different interest rates and fee structures. Be sure to research the full range of lenders available or ask your Board/Advisors for recommendations and introductions.
Third – Approach lenders 6+ months in advance
This gives you time to negotiate the best deal and avoid running too low on cash as most lenders won't lend to companies with less than 6 months of cash runway (defined as current cash divided by average monthly net cash outflow).
Approach the lender the right way
Every lender has their own specific profile of companies they can lend to, so do research online first. When you approach a lender (either online or by email), summarize your business solution and financial highlights & credit request to see if the lender wishes to explore further. If yes, then ask what additional information they need to see. If not, then ask them to suggest an alternative lender.
Make sure to provide all the information the lender asks for, if you skip key information this will cause delays or your application will simply be rejected. Bear in mind: different lenders can ask for different information and some accept online uploads, others file attachments by email.
They will, however, all want to see your financial history and will focus on revenue growth, margins, and cash flow profile, as well as the type of customers you serve, how much they pay, how often, and in which geographies.
Remember to be open to different credit solutions. If your revenues are increasing, a line of credit may be suitable (and cheaper) than a loan for funding sales & marketing expenses and working-capital needs. However, if you are heavily loss-making and VC-backed, then a venture loan will be more suitable than an overdraft.
Information a lender asks for
- The amount and type of loan or credit facility you’re seeking, what you will use it for, and the timing of use
- P&L statements, balance sheet, and cash flow model (monthly) for the last 12 and next 24 months
- Key metrics you’re reporting at the Board level
- How you can repay the loan or credit facility in a downside scenario
- If you’re not profitable: who are your investors, when is the next equity round, and when will you anticipate you’ll reach cash flow positivity
The more detailed your financial information, the easier for lenders to assess and offer the best credit solution for your business. Providing all the financial information the lender asks for quickly makes a faster smoother process and gives the lender comfort that you have good financial controls and run a well-managed company.
Once you get credit offers, make sure to calculate the full cost of the facility options over the full term. Make sure to include any setup fees, non-utilization fees, early repayment fees, and warrants as well as the headline interest (or stream rate). Only then can you compare the credit options and the total cost of servicing the facility as well as the impact on your business (including additional terms like covenants that some lenders ask for).
To see how much working capital your business could potentially access with Capchase, try out our runway calculator.