Preparing for a fundraise
Lets start with what lenders DON’T care about: Pitch decks and 15 year projections.
Since these lenders are not taking equity, their ROI is limited to the terms of the agreement.
Therefore, a lenders main focus is on trying to minimize risk of their investment in order to increase the odds of a beneficial outcome.
Because of this, lenders value cold, hard, numbers.
Numbers will tell them what they need to know in order to calculate risk and whether to proceed with an investment or not.
How do lenders evaluate risk?
Most modern lenders will make you connect financial accounts to determine the risk factor associated with your business.
This is usually in the form of sales data (from a source like Stripe), accounting data (from a source like QuickBooks), and your business bank account (through a Plaid connection).
This is generally enough information for a lender to understand what makes your business tick, how capital allocation can help, and the risk factor associated with you business.
Lenders can also ask for certain KPIs to understand what the driving force behind your business are.
This is a less standard practice as the aforementioned connections will usually be enough for a lender to calculate the risk factor.
Matching with the right partner
The first thing to consider when matching with a partner is what business type the funding partner has expertise in.
This is important as this could foreshadow their ability to guide you through any issues in an industry that they understand.
While many lenders will lend to multiple business types, they generally have a primary and secondary focus.
The second thing is to consider are the benefits they offer.
From no credit checks, to no prepayment penalties, different lenders offer different perks in relation to the funding agreement.
This is very important to many founders as there are certain issues they feel strongly about.
The third, (and maybe most important), factor to consider when choosing a funding partner, is trust and communication.
A partner that you can trust will give you the peace of mind to focus on growing your business and not constantly keeping an eye on your partner.
While most funding partners are professional, founders want a partner that you can easily communicate with.
This is especially important if the business is facing any challenges that a funding partner is able to guide you through.
Managing multiple funding partners
What is the advantage of having multiple partners?
This is a really great question and there are two common cases where multiple partners are utiized.
The first case is when one partner can't provide the full amount of capital you are looking for. In this case, splitting your funding target between two or more capital partners is a viable option.
The second case where a team desires multiple capital partners is if you want to access multiple funding types.
In this case, one partner might extend a line of credit and another might offer a revenue share agreement.
Different funding types might be accessed to accomplish different objectives.
Of the group of partners that are lending to you, there will be one “senior lender”.
The senior lender is the lender in the group that has the most rights.
This lender will sometimes ask that the other lenders sign a subordination agreement.
A subordination agreement establishes an order of loan repayment should there not be enough money to repay all lenders involved.
Subordination agreements are pretty common and your capital partners should be familiar with them and the content they contain as they are all similarly structured.