The Role of Portfolio Support and Analytics in Venture Debt – A Borrower’s Best Friend

Avisha Khubani

Categories: Borrowers

When people hear venture debt, they often mistakenly picture a struggling startup that is in desperate need of cash. However, that is far from reality. Many late-stage companies use debt financing as an alternative to equity to avoid dilution and fuel growth. Sounds great, right? While anyone can write a check, it takes a collaborative partnership between borrower and lender to ensure success for both parties.

Experienced lenders will have a dedicated individual or team to support their portfolio companies – a necessity given the disruption that entrepreneurs face on a daily basis. Whether it’s a bump in the supply chain or unforeseen obstacles caused by a global pandemic, businesses need to adapt to quickly changing market conditions. Although new deals often steal the spotlight, it’s the behind-the-scenes work during the course of the loan that can be the unsung hero. Having a comprehensive support system can help identify potential challenges early on, so borrowers can adjust their strategy to meet their goals.

Why Does a Support System Matter?

The job of portfolio support and analytics is to keep track of how companies are performing relative to their business plan and financial targets. This can help detect early warning signs, enabling a business to get ahead of an unfortunate situation and determine how to get back on track. Without this function, companies can run out of cash sooner than expected and consequently be forced to change plans. Identifying liquidity issues several months in advance allows enough time for a company to (1) pivot their strategy to reduce cash burn, (2) raise additional debt or equity, (3) refinance current debt, or (4) engage with an investment bank for an exit event.

What to Expect as a Borrower?

Lenders will typically request updates from their portfolio companies every 30 to 90 days. This often includes financial statements, sales projections, bank statements, and other management reporting. When looking at performance metrics, cash is king – a company’s cash balance, its burn rate and length of runway are all evaluated. Additionally, a lender will determine if a company is tracking towards its budget, as this will validate (or invalidate) the growth trajectory communicated to investors. These fact-finding exercises improve transparency between borrower and lender – prompting conversations when needed and helping companies remain compliant with their loan agreement. Strong performing companies may receive lower interest rates, more relaxed covenants and additional capital, if requested. As a borrower, be open, be communicative, and make sure, up front, you have chosen a lender that values the partnership and has a steady hand. It will make navigating difficult times far easier.

Why it is Important to Look Beyond the Balance Sheet

If this year has taught us anything, it’s that the world is an unpredictable place. Nobody could have imagined we’d be amidst a global pandemic that would affect so many businesses in so many sectors. A good lender will not only look at financial performance metrics, but also non-economic factors that could impact a business directly or indirectly. This can be things such as emerging technologies, environmental issues or government regulations. An experienced lender that has seen many different scenarios can better anticipate these challenges and help when the unexpected happens.

However, just having a support and analytics team in place is only half the battle. A lender must have team members who borrowers can trust and communicate openly with to share critical information. To judge a company by only looking at the numbers (without having a meaningful dialogue with the borrower) may only tell half the story.

Our advice? Be sure to discuss the portfolio support and analytics function up front with your potential lending partner before cashing the check – as not all lenders are created equal.

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