Understanding the process a lender goes through to fund a business is important to be able to assess the chance and timings associated with a loan funding.
It also helps you as a potential borrower to move the process forward efficiently.
In the following infographic we present the key steps most businesses go through to get funding.
Note that the timings vary with each lender, so we have listed here durations we believe are average.
Funding Process: From First Meeting to Funding
The funding process of Growth Capital usually takes two to three months (as opposed to three to six months for bank debt and six to 12 months for institutional equity). Your growth initiatives can kick off fast, with management time not taken away from the job of running and growing the company.
The key steps involved in taking on growth capital are:
Good quality information is the key to a swift process. And the better prepared you are, the more impressed investors will be.
Find out more tips on getting a growth loan for your business.
Once the growth lender has got to know your business, the next stage is to issue you a term-sheet. This is a legally-binding document summarising the key terms of your agreement with it. A signed term sheet from a lender means it is on-board and keen to fund you. The likelihood of moving to funding is very high.
The lender will develop a better understanding of your business and make sure information shared is accurate. The main actions include:
- Financial due diligence: a third party looks at your historical accounts and analyses financial forecasts;
- Research into the market: growth lenders focus on this element in less detail than equity investors but still want to understand key market dynamics;
- Customer references: the lender may talk to your customers where relevant in order to better understand your product or service and how you’re positioned in the marketplace;
- Co-investors consultations: the lender will talk to your equity investors if the business is backed by other institutions.
Legal documentation typically includes three standard documents:
1. The loan agreement is a standard contract between the lender and the borrower regulating the loan facility;
2. The debenture creates and acknowledges the liability of the company to the lender;
3. A warrant instrument lists the terms and conditions of the equity kicker.
If you’re using multiple sources of debt, you will also need:
1. An intercreditor agreement to regulate the rights and ranking of two or more lenders;
2. A subordination agreement to make the lien of a party junior or inferior to the ones of another party.
Legal documents are drafted by the lender’s lawyers and revised by the company’s lawyers. Most businesses use an external lawyer to advise them on this element of the transaction.
This is an excerpt from our white paper, download The Growth Lending Guide to learn more and discover how a Growth Capital Loan can help your business growth without equity-loss.