Loan Guide: Short guide to raising a loan
Understanding the process a lender goes through to fund a loan is important to be able to assess the chance and timings associated with a loan funding. It also helps a potential borrower move the process forward efficiently.
Here are the steps most borrowers go through to get a loan (this is the process BOOST&Co goes through). Timings vary with each Lender, so we have listed here durations we believe are average.
|1- Prepare||Identify Loan need||1-2 weeks|
|Debt market scan||1-2 days|
|Identify prospective lenders||1 week|
|2- Negotiate||Receive Loan offers||1 weeks|
|Sign Term Sheet||1 weeks|
|3- Transact||Due diligence||2-4 weeks|
As a potential borrower, preparing is all about making sure that lenders can go through their process efficiently and presenting a well-organised, coherent story to potential lenders.
The hardest part for most companies is to create a clear financial model which they know they will be able to deliver in the short-term and is credible in the long run. The importance of short-term performance cannot be underestimated: no lender wants to lend to a company which fails to meet its short-term targets. The financial model should be created to work monthly, and have a full P&L, cash-flow and balance sheet statement for both historical trading and estimated future trading. This is the same for both growth capital and venture debt options.
Another key preparation is to identify potential lenders early on, so that all potential lenders are contacted at the same time and could give the borrower more power in pricing discussions. We have called this ‘market scan’ in the table above. All good market scans start with reference calls to friends and online research.
Negotiations start by understanding in detail who your potential lender is and how they will behave once you have a loan from them. This is as important to understand as the financial terms of the loan because you are forming a long term relationship with your lender.
Once a potential borrower has narrowed their choice to 1-2 lenders, they should then ask about each lender’s process in detail to understand exactly where they are in the lender’s decision process. Some of the key questions to ask are:
- Steps in the decision making? Make sure you understand in detail what each of them means
- At each step, what decision do you take? Who takes the decisions? — ensure that you know who the stakeholders are in each decision. You should make sure you have met at least one of the key decision makers, though this may not be possible (some lenders separate client facing from decision making people to ensure decisions are made on objective criteria)
- Timings for each step? Average duration of these steps for loans this year? Benchmark this as lenders may give you an optimistic view, they are still in selling mode.
The reason borrowers should understand these details is to have clear expectations of timing, and ultimate success of the financing.
This is where most of time can be lost in the process, either because a potential borrower does not have available information requested at hand or because decision cycles with the borrower take a long time (e.g., to negotiate legal documents).
To minimise this, borrowers should put in place an efficient communication method with the lender (e.g., weekly calls) and have clear dates as milestones.
Growth Finance – The Growth Lending Guide
Do you want to help your business grow without giving up control? In this guide you will find everything you need to know about Growth Finance and how to fund growth preserving equity.