Accessing the debt markets for the first time

When a company transitions from early- to late-stage growth, capital sources beyond equity and venture debt become viable alternatives. Business owners, management teams, and boards of late-stage growth companies may be able to access structures that will better scale with the business over time, namely, recurring revenue or cash-flow-based facilities. Importantly, just as entrepreneurs take care in assessing shareholder dilution and future funding capacity in their equity partners, companies should take equal care in choosing the right lender and debt structure.

When a company is considering debt as its next capital source, management is wise to look well beyond a year or two, because lending relationships typically last for many years. Finding the best terms for an initial loan is less valuable than finding a trusted partner that will best serve the company for the foreseeable future. Determining which lending partner can successfully execute not just the immediate transaction but also the next several is important.

A lending partner who understands your business and industry will provide agility and scale as the business continues to execute on its growth strategy. In this chapter, we will walk through the optimal process for raising debt capital, as well as the final step of choosing the best financing partner.

Step 1: getting ready

Once a company decides to seek debt capital, it is essential to assemble the right information ahead of any conversations with potential lenders. Required information will include a recent management presentation, historical financial statements, financial forecasts, a sales pipeline, as well as customer data that together will illustrate the risk profile of the company and drive the size, structure, and pricing of the debt facility.

Management presentation

Management presentations that are used to educate and update shareholders can provide lenders with a better understanding of the business and assist in the underwriting process. The presentation should include the Key Performance Indicators (KPIs) that drive your business. Ongoing financial management presentations should be shared regularly with the lender to ensure plans are aligned with expectations and supported.

Historical financials

Lenders look for historical financial statements comprised of income statements, balance sheets, and cash-flow statements, preferably audited and presented on a generally accepted accounting principles (GAAP) basis. Additionally, interim year-to-date statements presented on a monthly basis, including the preceding year’s corresponding statements, will allow a lender to calculate the most recent trailing 12-month performance. This helps a lender see the trajectory of the business and understand the growth patterns. You should be prepared to answer questions about trends, margin shifts, working capital, capital spending, and cash-flow generation. The ability to show detailed cost of goods sold (COGS) and operating expenses (e.g., selling and general and administrative expenses, R&D, sales and marketing) will speed up the initial due diligence process.


A financial forecast model is crucial to providing potential lending partners a view of projected revenue growth, gross margin trends, capital expenditures, and cash uses. Lenders would prefer to see this presented on a quarterly basis, including income statement, balance sheet, and cash-flow statement. A forecast helps to illustrate a path towards positive cash-flow generation, with earnings before interest, tax, depreciation, and amortization (EBITDA) often serving as the proxy and the measurement to which lenders will apply a leverage multiple to determine overall debt capacity. Often lenders will make adjustments to EBITDA to reflect the cash generation of the business, such as adding changes in deferred revenue, which is referred to as cash EBITDA. Forecasts are also instrumental in setting financial covenant levels for liquidity and leverage, since they provide insight into growth and the impact it will have on the company’s cash position.

Customer data

Lenders will also want to see a detailed sales pipeline report. The pipeline provides insight into the sales cycle and gives credibility to the company’s overall revenue forecast. A good pipeline report will include potential revenue by prospective customers, existing customer renewals, and upselling wins. It should also illustrate the sales stage and probability of closure for each opportunity. To further bolster forecast credibility, companies should provide lenders with a historical look at the pipeline and actual sales conversions.

In terms of customer data, lenders will want to understand the components of revenue growth, including revenue derived from existing customers versus new customers as well as concentration of total revenue by the top 10 or 20 customers organized by geography and industry. Contract terms, including commitment length and payment terms, will help determine the predictability of revenue from any single customer. Diversification in the customer base is important. While having blue-chip customers is an attractive attribute for any company, high concentration among a few customers is a potential risk. Retention rates and length of relationship are also important data elements, because they demonstrate market acceptance of the company’s products as well as the likelihood of strong future cash flows from a recurring revenue base.

Once this information is provided, the lender will focus on recurring revenue, revenue growth, gross margin strength, healthy customer retention, trends in adjusted cash flow and EBITDA, liquidity, leverage, and the company’s ability to repay debt.

Step 2: vetting lenders

Often a board member, equity partner, or even a large customer or vendor will provide initial introductions to lenders. You should also include regional and national lenders who are active in the industry on your list. There are four main areas to consider: industry knowledge, product breadth, people, and focus on emerging growth companies.

Industry knowledge

It is critical for your lending partner to have experience and expertise in your industry, as this will ease every part of the capital-raising process. With this experience, lending partners will be more supportive of market “add-backs” for mergers and acquisitions (M&A), EBITDA adjustments common within an industry, and industry-driven one-time events. Asking lenders for credentials and references in your industry is a good way to determine their industry knowledge.

Product breadth

There are various types of debt and related products that lenders may offer their clients. Lenders should have the ability to support  facility sizes from $20 million to $500 million so that they can support the growth of the company over a long period of time. In addition to size, companies should assess lenders based on the breadth of the structures they can offer. Ideally, a lender will offer revenue- and cash-flow-oriented debt facilities in addition to asset-based facilities.

Asset-based loans, where availability of funds is governed by the size of the company’s liquid assets, can be useful structures for companies with low to no growth. However, they are administratively burdensome and much less scalable over time for growing businesses.

Another consideration is whether or not the lender can support and underwrite transformative events such as acquisitions, large “leveraged” dividends, or management buyouts. Further, companies should also assess not only the ability of lenders to offer risk-management products such as foreign exchange or interest rate hedges but also whether the lender understands how those products are best utilized in your industry.

Companies should also consider a lender’s ancillary operating products, such as payment automation or other cash management services, which can simplify a company’s treasury functions and accounting practices. A robust treasury platform could be highly beneficial to your company over time and should be able to support your growth, whether that includes adding international capabilities or integrating corporate investment services.

Some of the best debt providers also offer integrated investment banking solutions. This allows management to work with a single team, providing greater strategic leverage of that relationship over time.


A common mistake is to limit conversations  only to those lenders you’re already familiar with. While vetting existing relationships is a fine practice, it is important to broaden your alternatives beyond these firms to identify the best long-term partner. Companies should expect potential lenders to field a broad team of senior-level professionals throughout the process. That team should include a relationship manager and experts focused on underwriting, syndicating, and investment banking. Having access to a broader team will demonstrate a lender’s expertise in your industry as well as a commitment to building a strong strategic partnership for your  company.

Emerging growth focus

A final consideration in selecting a lender is to find one that focuses on emerging growth companies that are or have been at a stage similar to your own. While the biggest firms may count your largest competitor as a client, their banking needs may be in stark contrast to your own. Are the majority of a firm’s clients and transactions comparable to those of your company? Will your business be a focus for them? Finding lenders that can speak to their experience and focus on companies similar to yours will ensure a stronger execution on the company’s behalf.

Step 3: picking a partner

After identifying, contacting, and providing the information assembled, the company should conduct a face-to-face meeting at its headquarters between interested lenders and the senior management team. Within two weeks, lenders will respond with financing views or term sheets for your evaluation.

Term sheets can vary from institution to institution. Some lenders will provide term sheets only after thoroughly vetting internally with necessary approvers of both credit and pricing. The benefit of this approach is that you know that the terms presented have a “soft approval” and if you choose to work with that lender, you will not be surprised by any major shifts during final negotiations.

Other lenders allow their teams to provide terms before conducting diligence, working through structural points with the company after the terms sheet is signed. While this can feel slightly more efficient in the short term, it can also prolong negotiations down the line if the approving team members cannot get comfortable with the company, industry, or other aspects of the transaction.

Greatest capacity

In order to achieve the desired capacity for growth, it is best to focus on lenders who provide recurring revenue and cash-flow structures. This will allow the scalability that an emerging growth company needs over time. A typical structure would be lending on a multiple of cash flow based on adjusted EBITDA with capacity set against certain leverage points. If your company generates a material amount of recurring revenue, a structure lending against this revenue base may be appealing until cash flow generation is achieved.

Lowest risk

Two components in reducing risk are flexibility and diversification. Flexibility refers to financial covenants, such as liquidity, leverage, and coverage of fixed charges. The number and threshold levels of these covenants can affect growth initiatives if they are set too conservatively and likewise lose their risk management effectiveness for lenders if they are set too wide. Other considerations include the ability to sell assets, make distributions, and acquire businesses, all of which can be negotiated with the lender during the initial phases of diligence.

As the size of your debt facility grows over time, managing diversification risk becomes more of a focus. Diversification refers to using more than a single lender to provide your debt facilities. As the company continues to grow and utilize debt as a funding mechanism, it will be important to consider broadening your banking relationship. Most lenders realize this and as facilities grow larger they can market your facility to other lenders, creating a “syndicate,” while still maintaining control over the day-to- day relationship. Typically, once a facility size exceeds $35 million, your company should consider adding other lenders to the relationship. Even if a lender emphasizes its ability to provide larger commitments during the marketing phase, companies should be wary of the power a single lender can have over a company under stressed conditions. It is therefore important to understand whether a lender has a strong syndicated debt capital markets capability, even if the use of one of those facilities is several years away.

Lowest cost

Building a relationship with a lead lender requires time and education on both ends. Savvy lenders will seek to educate their new clients on the holistic banking relationship, including the syndication process, cash management systems and options, the importance of a scalable loan document, and important financial attributes that may improve a company’s risk profile to lenders. Many first-time borrowers will overlook this relationship building and focus on rates and fees as the primary factors in choosing a lender. However, this could hurt a borrower in the longer term. While consideration of rates and fees is important and relatively easy to understand, the addition of warrants, equity kickers, and conversion features can make comparison of term sheets difficult.

Other factors can be much more important than interest rates and fees. Our research shows the average life of a loan is approximately one-half of the time to maturity, because most transactions are refinanced for some material reason.

Refinancing can be caused by many factors, including:

IPO: How will future public equity investors view the lender and structure?

M&A: What is a lender’s ability to finance material acquisitions?

Adverse performance: How will a lender behave if a company has failed to achieve its financial forecast?

Identifying a lender that can help navigate through all these potential scenarios holds tremendous value for a borrower over the long term.

The upfront investment into the development of a thoughtful, fully negotiated set of legal agreements will not only increase flexibility for your company in the immediate deal, but it will also provide a document that should live with the company for several years and multiple debt transactions. Playing a bigger role in the early documentation will ensure your ability to operate your company effectively within the confines of the agreement.


Ascertaining the experience and expertise of your potential lending partner in working with companies like yours is crucial for your success. Ask to speak with a lender’s clients in comparable industries and with similar loan sizes. Lenders will typically show a company all of the transactions that their firm has recently completed. It is important to consider only those references that are from the same team that your company will be working with, because these individuals will ultimately drive your relationship.

Final thoughts

Maintaining a healthy relationship with your lending partner requires an ongoing investment of time. Monthly and quarterly financial information demonstrating compliance with the loan terms will be required, and quarterly business update meetings are recommended. As the relationship progresses, a good lending partner will proactively provide additional capital, ideas, and services. Choosing a lender with the best combination of people, industry knowledge, product breadth, and the ability to grow with your company will make the most of your investment of time and money.

John Brock, Managing Director, KeyBanc Capital Markets Inc.

Sarah Hill, Director, KeyBanc Capital Markets Inc.

Gabriella Blunk, Analyst, KeyBanc Capital Markets Inc.