5 pre-deal questions to ask your venture debt lender

As we spread the good word in the U.S.A. about Wellington Financial, I’ve come to appreciate just how differently various venture debt firms approach the same deal opportunity. CFOs try to find similiar threads between the various product offerings, but as with buying a car, you can’t always switch “options” between different car manufacturers.

With the contraction in the North American debt markets, it is a great time to launch in a new market. Particularly if you’ve got a stable funding source (such as pension fund capital). But the range of choices and flavours between capital providers makes it tough for entrepreneurs to access the right funding path for their own situation. Here are the five questions to ask your venture debt lender…before you even get into terms and conditions:

1. What is your funding source? Hedge funds, public market equity, pension fund / life insurance capital, government vehicle, bank warehouse lines, a combo? Is the capital permanent? When do you next have to renew your funding deals?

2. Is your fund levered? Do you rely on a bank line or similar debt facility to fund transactions?

3. Who is on your investment committee? Are any of your lenders / investors on the investment committee (if you have any lenders involved in the ultimate funding of your deals)? Is the investment committee aware of your deals before term sheets are signed, or do they first come to learn about a deal once it is formally presented for funding approval?

4. Do you outsource any of your due diligence? Is that going to cost extra or is it built into your stated deal fees?

5. If you rely on “material adverse change” clauses in lieu of a financial covenant in the loan document, give me an example of what would have to happen in our business for that to kick in? Would you put that in writing?

There are plenty of ways to diligence your capital provider. Calling VCs that they’ve worked with in the past is a great place to start, yet few ever take that step. This list doesn’t replace that type of “worm’s eye” view, but it’s essential that CFOs know a little bit about the venture debt firm’s plumbing before pulling the trigger.

Unlike the VC world, not everyone in the venture debt business controls their own capital. And some have to borrow the capital themselves from a debt syndicate before being able to advance funds to your business. That matters if you’ve got a multi-year deal and yet their funding source is up for renewal annually, for example.

For all the energy that goes into doing a series of reference checks before hiring a new employee, you can’t go wrong by better understanding these key questions when searching for new capital.

MRM