August 4, 2022
Finding a dedicated institutional partner to provide credit financing is critical for future growth and scale. However, private credit investors have high expectations when it comes to due diligence. They are far more risk averse than equity investors. Their borrower due diligence typically includes taking a deep dive into your financial, management and operational processes.
If your team lacks capital markets contacts and experience working with private credit investors, connecting with investors and preparing for their rigorous examinations can be challenging. Before you even compile your investor presentation, you can implement important changes to show investors you are running a sound operation and offer an attractive private credit investment opportunity.
What it Takes to Be a Standout
At Finitive, we have reviewed hundreds of borrowers seeking to connect with investors via our platform and they vary significantly when it comes to due diligence readiness. Here are 8 important ways to elevate your company and ensure you are investor ready:
1. Show performance metrics for your portfolio. Your company may be young, but you will likely have a set of successful pilot originations. It’s important that you present your processes and metrics on loan performance, including originations, delinquencies and defaults.
2. Engage a 3rd party loan servicer. Loan servicing is an important aspect of performance. If you are currently servicing loans in house, strongly consider engaging a third-party loan servicer to handle this for you or put a backup loan servicer in place. In an investor’s view, this removes a layer of risk and makes you a more attractive financing prospect.
3. Demonstrate your process for handling delinquent accounts. As a non-bank lender, how you handle delinquencies is as important as your origination strategy. Your delinquency policy statement should lay out when your servicer or your firm contacts the delinquent borrower, how you pursue payment and what your charge-out policy is.
4. Define and document your underwriting policy. Having a well thought out and documented underwriting policy and manual is critical. Lenders want to know exactly what they are financing.
5. Showcase your origination strategy. Outlining how you will generate originations, taking into consideration the marketplace opportunity and your competitive position, is a key part of showing institutional investors that you have a strong business model.
6. Ensure your compliance reporting is up to standard. Institutional investors will inspect your in-house compliance systems and infrastructure to ensure you can deliver a clear audit trail on your borrowing base, covenants and triggers. This demonstrates that you can stay in compliance with your debt facility. While all of this may not have been required in your pilot debt facility, institutional lenders will require it.
7. Present your 3-year business plan. Your plan should lay out your path to scaling the business, mapping out how your originations will grow in the coming years. Articulate why you’re in the business you’re in and justify its merits. Quantify the size of your addressable market, your go-to-market strategy, your retail or wholesale approach and your staffing plans.
8. Tailor your investor deck. To attract credit financing, your capital-raising deck may need modification, especially if it was originally conceived as an equity-raise presentation for venture capitalists. Credit investors are seeking a completely different risk/return profile than VCs. They are more conservative by nature and want lower risk. Detailing the financial, operational and governance controls you have in place will help them check their boxes.
As an entrepreneurial organization, you shouldn’t be dissuaded if you get turned down by your investor of choice. If you’re told you are “too early stage,” do not sit and wonder why. Follow up for more detail to get additional color on what they found. Understanding the concerns an investor had in the due diligence process can help you zero in on the management, governance, infrastructure or process weaknesses you need to address.
Saving Time and Accelerating Financing Transactions
Connecting with institutional lenders can be a time-consuming process of crafting presentations, networking and finding investors, negotiating NDAs, arranging meetings and undergoing due diligence. It does not have to be this way.
You can vastly shorten the time it takes to find private credit investors by signing up with Finitive, a data-driven private credit marketplace.
Finitive is designed specifically to help issuers secure transformative capital by connecting them with a large and diverse network of investors actively allocating to private credit. After registering for Finitive, you can quickly connect with appropriate investors through extensive data-matching. Find the right lender at attractive terms in a few days - not 4 to 6 weeks.
All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Readers are recommended to consult with a financial adviser, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity. Private investments are highly illiquid, speculative and are not suitable for all investors. Investments can lose their entire value. Securities on the Finitive technology platform are offered through North Capital Private Securities Corporation, member FINRA/SIPC.