Real Available Amount

Do not focus only on the titles and big font letters. In some cases, you can find term sheet wording like “$2,000,000 credit line agreement”, but later in the actual deal terms you will find out that only 40% of that amount is available for immediate use. The rest is under tight restrictions, milestones, financial covenants (such as minimum liquidity requirement) or else. In such case, its’ not only that you cannot freely use $2M, but you must also pay fees/interest on the unused capital. You are “punished” twice – first, you are not allowed to use the entire amount, and second – the amount which you cannot even not use costs you a lot of money and dramatically increase the overall cost of capital you pay on the entire deal.

Also look for ongoing limitations in the terms offered to you – often the lender requires that your outstanding loan amount never exceed, for example, 4X your latest monthly revenues. This means that in case your MRR tops $500k today and you enter a $2M deal for 3 years – if 10 months later your monthly revenues drop to $300k (even only for a few months) – you will immediately be required to pay back $800k to the lender (not to exceeds 4X300=1,200 outstanding loan). This contradicts the peace of mind you wanted for 3 years.

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Suitable scheme

Identifying a financing scheme/s that fits the needs and profile of your company is most important. Study your own fundability profile, in order to avoid months of walking in wrong directions. For example, if you compare some main capital providers such as Clearco, Lighter Capital, TriplePoint, Capchase, Decathlon Capital, SVB, SaaS Capital, Hercules, PIPE, WayFlyer, Trinity, Montage Capital, Runway Growth Capital, WTI, Arc Technologies, Braavo, Wayflyer, Founderpath, Levenue, Vitt and Uncapped, each apply different financing models which best fit only specific type of companies (others will eventually be rejected or will be offered suboptimal terms). Do not spend time on process with lenders who provide schemes that are not best for your business and financial profile.

You prepare and understand your own fundability profile and the suitable financing scheme by expert advisors or by free financial analytics tools such as Butterfi.com.

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Repayment Date (also called Maturity Date)

In some cases, the lender has its own policy on the loan tenor. Some lenders may work with 18 to 24 months’ tenor schemes, others are more comfortable with 24-48 months. If you seek a bridge loan for 6- 9 month, for example, then a loan repayment after 36 months is way too long for you. In such case you either look for a different lender which can provide less and 12 months’ loans, or you want to make sure that the loan terms contain an early repayment option with good terms, i.e. that the fee of triggering it (usually called “early repayment fee”) does not turn the whole loan to unreasonably costly.

In another example, the lender may offer a short term loan, say full repayment within 9 months, but you actually seek finance for 36 months. It could be that the loan offered to you does not fit your needs, or you can try negotiating with the lender an “automatic reload” (extension), which means that if after 9 months your business/financial status has not deteriorated, then the repayment date will move another 9 months forward, and so forth until the loan ends after 36 months. In order to ensure that you can enjoy such automatic reload – make sure that “status has not deteriorated” is clearly defined by simple and fixed figures, and is not subject to the lender’s discretion or interpretation.

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Negative Covenants

Negative covenants, which are specific business restrictions imposed on your company, are common in debt financing. Since in most cases your lender is not entitled to a seat in the board of directors, the negative covenants are indirect instruments for the lender to ensure that you do not make drastic moves or major changes, which can risk or delay the repayment of the loan, without prior consent from the lender. Typical negative covenants can be – without prior consent from the lender – the company is not permitted to execute capital restructuring, dividend distributions, approve a sale of majority/control stake, increase of management compensation, sale of subsidiary or major assets etc. There are two key points about negative covenants: (1) always make sure that the covenants curve outs any specific actions which the company expects to take, and (2) always makes sure negative covenants approval process by the lender is limited by time (ideally 3-7 days) so it does not delay or interfere in managing your business.

Financial Covenants Vs Reality

Many lenders add a list of financial covenants which are kind of “negative milestones” – this are financial figures which if met by the company – the lender can immediately demand for a full payback of the loan (before the agreed repayment date). These conditions are called – Financial Covenants.

Some example of financial covenants: (1) If your sales drop below $200k/month for 3 consecutive months; (2) If your burn rate exceeds $100k/month for 5 consecutive months; (3) If your debt to equity ratio exceeds 0.8; (4) if your EBIDTA drops below a certain level.

Those financial covenants are part of the lender’s protection and they are not rare. However, you must make sure that there is enough room (cushion) between your business projections and those covenants. In the sample covenants where you are required to keep your sales above $200k/month – in case you project your sales to be $450k/month then you have enough cushion, but if you project them to be $250k/month for some time (even if due to seasonality) there is too small room for mistakes (i.e. you had better negotiate easier covenants, say $100k/month Sales).

Remember – triggering a financial covenant is a nightmare – not only your business deteriorates to levels you did not project, but now your lender requires a big repayment check immediately or otherwise he can take measures such as enforcing the securities or declaring your company as insolvent.

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Know Your Lender

Your lender (or non-dilutive investor) is de-facto a creditor to your company, and as such it holds some key rights and powers over your company. Those rights come to protect your lender’s right to full loan repayments, but these right might also be abused against you if given to bad guys. The good news is that an honest and reputable lender (most of them are such) has no reason to abuse those right, on the contrary – abusing the rights in one case can damage the future business of such lender with other startup.

Always make sure that your lender is a long term reputable player and as result has good incentives to perform well and play fair and friendly. If you are not confident – you had better perform a background check (through the lender’s shareholders, BOD members, partners and portfolio companies). A bad lender can make a lot of troubles.

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