Inside Look: Structuring a Venture Debt Agreement
Introduction
Curious about how we structure a venture debt agreement? In this blog, we share a glimpse of our process, team and the dedication that goes into every partnership that we form here at Fundabl.
We are proudly an alternative business lender, and a fintech start-up ourselves, which means we can be flexible when it comes to process. The steps we take often vary based on the individual needs of a business. At a high level, our process can be broken down into 3 simple phases, which we’ll unpack further through this article.
- Discovery: understanding a business, its founders and the need for venture debt funding.
- Credit Underwrite: evaluating a business to determine its growth potential and its ability to repay a loan.
- Funding: negotiating venture debt terms, formal approvals and transfer of funds.
Discovery
In the discovery phase our leadership and growth team will first have an introductory call with each business to gain an insight into its operations, the founders, and their funding requirements.
This involves delving into the concept behind the business product or service, assessing what market need it addresses and its ability to dominate this market. We’ll talk to financials at a high level, understanding revenue, existing runway, any existing debt & security, and importantly any previous equity rounds and investor support. We unpack what funds are requested, intended use of funds, and any guidance on the businesses ideal funding profile.
Equally important is understanding the founders' backgrounds, experience, and expertise. This holistic understanding of the business, market fit, and the founders’ capabilities helps our team gauge the start-up’s growth potential and its alignment with our own strategic goals and values. We are committed to building long-term relationships and supporting our partners throughout their growth journey. We often find that discovering shared values can be the most crucial part of the process.
The Discovery usually consists of an Introductory call and 1-2 follow up meetings online or face-to-face.
We encourage businesses to explore multiple lenders at this stage to make informed comparisons and confidently select the partner that best aligns with their needs.
Credit Underwrite
Following the Discovery, businesses will need to complete the onboarding form on our website and provide access to accounting and banking software for our credit review. This part of the process is managed by the experienced advisors on our credit team.
We review a number of credit metrics including annual recurring revenue, annual revenue growth, fixed and variable costs, runway, any previous equity funding rounds, and more. This is considered a baseline to determine a business’s ability to repay a loan.
Baseline is the key word here. We’re founders ourselves, we understand the growth process, and that every business’ journey is different. We understand that it’s not black and white, yes or no, based on traditional credit metrics. We can be flexible and use different methods to determine scalability and provide confidence that a business would be able to make repayments – methods vary based on business model, industry and individual business circumstances. We strongly believe that all promising businesses should have the opportunity to secure the funding that they need to grow.
Once our credit team are comfortable that a business is eligible for funding, we will send out a formal offer letter with proposed funding terms.
If we are unfortunately unable to fund a business, we support founders however we can and offer connections and introductions to our network.
Funding
Lastly, we negotiate funding terms to deliver an optimal outcome for both parties, ensuring that the debt is tailored to meet our partners business requirements. Venture debt terms include loan amount, repayment period, interest only periods, covenants, warrants and more.
We're focused on providing founder-first debt funding terms that support founders to scale, whilst maintaining more ownership of their business.
Once the debt terms are agreed and contracts are signed, we send out funds as quickly as possible, often within hours.
For us, transfer of funds marks the start of our partnership with each business in our portfolio.
If you’re interested in Fundabl’s alternative business funding, contact us here or schedule an introductory call with our Co-Founder, Ethan Singer.
