Originators sometimes fall into the common trap of only considering the hard data such as interest rate, facility amount, draw period and cash reserves when trying to secure a debt facility, while leaving other non-quantitative important information outside of their decision-making process. Hard numbers are super important to look at, of course they are, they will determine your ability to grow and how profitable your product will be, but looking at just that would be the equivalent of only considering a company’s cash flows and not its actual products when doing a valuation.

Choosing a debt partner is one of the most important decisions a fintech faces every 3 to 5 years. Their relevance only grows when choosing the first or second debt partner in a company’s history. It will not only provide resources to grow operations, but, if chosen right, it will also be a source of market data, risk analysis and operational insight; much of which will be almost impossible to get without them.

What type of relationship should you aspire to build? You should consider your debt partner as if they were another shareholder in the company and treat them as such. When securing your first credit facility, it is very likely that your lender has more money invested in the company and its assets than the operators and the investors combined. You should aspire to go beyond a quid-pro-quo relationship where they supply money, and you pay them back plus interest. What does this mean? Stay close to them, give them constant updates on the state of business. Ask their opinion when launching new products or expanding to new countries. Most of the time, they will have experience with similar companies that have faced similar questions and problems.

What should you look for? We could create a never-ending list of qualities you should aspire to get in a debt partner, but we will focus on three: personal trust, business understanding and recognition.

Personal trust

This is probably the most important and the most difficult to assess. Here is a list of several questions that will help you frame this: How do you feel in the room with your lender? Can you speak openly about your business and the state of the economy? If things were to go south, do you think your debt partner would let you go down alone, or would they roll up their sleeves and help you solve whatever mess you have? Can you get along with them? As we mentioned above, you should consider your lender another shareholder in the company, they should be rooting for your success and not placing extra hurdles in the race.

Business understanding

Your debt partner has to offer more than just money, they should understand your business and operation as a board member or a C-Level executive. Again, we list several questions to ask yourself and your team: Do they have an operations background? Do they have experience in the same market or industry as yours? Are they familiar with your current challenges? Can they help you plan for future opportunities? How is their track record? When dealing with problematic situations, how do they act? If you needed their help, would you trust their intuition about your business?

Recognition

There are several important VC funds that signal to the market that a startup has a promising product or team that is doing great things. The same happens with debt funds, some are more recognized than others and carry a heavier weight in the perceptions game. Think of them as a stamp of approval, saying to the market: this is a serious business that knows how to take care of its partners and obligations. Especially in emerging markets where access to resources is much narrower than in developed markets, having a recognized lender in your corner will help you open doors you never knew existed.

We only mentioned what we think are the three most important qualities every company should screen in a debt partner before agreeing to a deal. As we mentioned above, you will have to deal with your lender for 3 years at minimum. Not every month you will have good news to share, sometimes bad or unexpected things happen, industries change, and pandemics do happen. You need to be able to share the good, the bad and the ugly, as you would with any other shareholder.

In the end, it all comes down to two simple questions: If you were stuck in a bad situation how would you like your debt partner to respond? And do you think they would act that way?

By: Fernando Muleiro

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