What a Lender Actually Looks At When You Ask for Money
Growth Funding

Equity investors are buying your upside. Lenders are buying the certainty of getting their money back. It is the same business and often the same financial model, but the question being asked of it is the opposite, and the pack that wins an equity round will lose you a debt facility.

The fastest way to be turned down is to send a credit team a pitch deck.

The only question that matters

A credit committee is not deciding whether your business is exciting. It is deciding whether the loan gets repaid on time, and what happens if trading turns out worse than you say it will.

Everything below is a different way of asking that same question.

Debt service cover

This is usually the first number a lender calculates, and often the one that decides the size of facility you are offered.

In its simplest form it is your available cash flow divided by your debt obligations: EBITDA less capital expenditure, over interest plus principal repayments. A result of 1.0 means you generate exactly enough to service the debt and nothing more, which is another way of saying that any bad month is a missed payment.

In practice lenders want to see comfortably above that, and 1.25 times is a common floor. It varies by sector, by lender and by how much security sits behind the facility, so treat it as a starting point for the conversation rather than a rule.

The useful thing to understand is what moves it. Capital expenditure is in the numerator, so a business that has to keep buying equipment services debt less comfortably than one that does not, even on identical profit. That is why two businesses with the same EBITDA get offered very different amounts.

The forecast has to be built from what is contracted

Equity investors will buy into a growth curve. Lenders discount it.

Build the forecast from what is actually committed: contracted and recurring revenue first, then renewals based on the churn you have genuinely experienced rather than the churn you would like, then new business weighted by real conversion rates from your own pipeline history.

There is one test that catches most people out, and it is worth knowing about in advance. An experienced lender will ask for the forecast you produced last year, and compare it to what actually happened. If you were forty per cent out, every number in the new forecast is discounted by roughly that much before anyone reads it.

Forecasting credibility is earned before you need it. That is an argument for producing a rolling forecast every month whether or not you are raising, which is part of what monthly management accounts are for.

Covenants, and why headroom matters more than the covenant

A covenant is a promise about the shape of the business while the loan is outstanding. Common ones include a maximum ratio of debt to EBITDA, a minimum interest cover, a minimum debt service cover, and a minimum cash balance.

Breaching one rarely means the loan is called in the next morning. What it usually means is that control shifts. The lender can reprice, impose conditions, demand information monthly instead of quarterly, or require the business to be reviewed by advisers you pay for. You lose the ability to make decisions without asking.

So the number that matters is not the covenant, it is the headroom between the covenant and your forecast. A model that shows you clearing every threshold by a hair tells a credit committee that the first difficult quarter puts them in a workout. Build the buffer in, and be able to say how much room you have and at what point it disappears.

The downside case is what you are really being assessed on

Any model can be made to work in the base case. Nobody presents a forecast that fails.

The version that matters shows what happens when it does not go to plan. What if the largest customer leaves. What if the sales cycle takes twice as long. What if rates move another point. What if a major project slips two quarters.

A lender who sees a properly built downside case learns two things: that the loan survives a bad year, and that the person running the business has thought about a bad year. The second is worth more than people expect. Credit committees are not run by optimists.

Security and personal guarantees

For owner-managed businesses this is usually the part that actually gets negotiated, and it is rarely covered honestly in advance.

Most facilities will be secured by a debenture over the company's assets. Many lenders will also ask for a personal guarantee from the directors, sometimes capped, sometimes not. Whether you can reduce or cap it depends almost entirely on how strong everything above looks. A business with clean numbers, real headroom and a credible downside case has room to negotiate. One without does not.

Ask early what the guarantee position is. It is not a detail to discover at the point of signing.

What to do before you ask

Have twelve months of management accounts that a third party can follow without you in the room. Have a model you can flex live in a meeting, because you will be asked what happens if, and answering it there and then does more for your credibility than the model itself. Know your debt service cover before the lender calculates it. Have the downside case built before anyone requests it.

Then approach lenders knowing which of them lend to businesses like yours, because a well-prepared pack sent to the wrong lender is still a decline.

If you are working towards a raise in the next year, funding and growth covers the model, the pack and running the process.

Nothing here is a recommendation to take on debt or to raise capital in any particular way. Whether borrowing is right for your business depends on circumstances this article cannot see.