• Blue Willow Group

Regarding the Highly Flexible Nature of the Term Loan Structure

Of late, I’ve been having more and more conversations with CEOs and CFOs indicating a need for flexible capital beyond what they currently have on their balance sheet. The discussions are an interesting blend of the necessity to be prepared for continued uncertainty and the desire to be positioned to capitalize on unexpected opportunities. While current cash on-hand may be sufficient to achieve projections and objectives, a deficiency may exist to execute on unforeseen growth or defensive needs. Many of our clients find a term loan to be a “Goldilocks” solution - just right. Read on to see why.

Term loans are non-dilutive.

Term loans offer the ability to add cash to your balance sheet without further dilution of ownership. While you can always work with insiders on an additional equity raise or convertible note, a term loan provides access to cash without giving up more of your company.

You are in control of disbursements.

Most term loan structures do not require you to draw-down on the entire loan amount at closing. While some have a minimum draw at closing, some do not, and most allow you to disburse funds when you need them. This ensures you’re not paying interest on cash sitting on your balance sheet which isn’t driving growth. Term loans structured in this manner act as a sort of hybrid line of credit.

You are prepared to execute on unforeseen market opportunities, acquisitions, talent, etc.

The competitive landscape is in constant flux. You and your team have planned for as many variables as possible, but you never know when a game-changing opportunity may arise. Having a term loan facility in place allows you to seize the initiative and capitalize immediately on opportunities. If additional growth capital is unavailable, you may not be able to secure a facility in time to secure your advantage.

You are prepared to weather the unforeseen storm.

My Q4 planning sessions for 2020 missed on a few things and I’m guessing yours too may have. Expect the unexpected indeed. With half the year left and continued uncertainty on a number of fronts, a term loan can be an excellent hedge against the unexpected. Many companies have had to cut critical personnel and reduce sales and marketing outreach as a result of reduced revenue. While necessary for survival, some of these companies would be in better shape today if they’d had additional capital to weather the storm of the COVID-19 pandemic.

Term loan facilities can be structured to grow with your company.

Perhaps your growth plans for the next 12-18 months include the need for a $5MM capital facility. In some instances, a company will not immediately qualify for the size of facility desired. Not a problem. We regularly negotiate milestone based facilities with lenders for our clients. For example, at funding the company might have immediate access to say $2.5-3MM and upon reaching revenue, retention, or other goals, additional funds become available.

Loan terms are flexible, creative, and friendly.

Term loans are typically light on covenants and have minimally invasive reporting requirements. Terms vary by lender but are usually 3-5 years in length and we regularly negotiate 6-12 month interest only periods. Rates are very reasonable - in the 8-12% range for venture debt funds and a bit lower if you qualify for funding through a venture bank.

Securing a term loan facility is a relatively simple process.

Once we determine a client has a need for a term loan, the process is quick and efficient. We gather some initial financial information including two years of financial statements, year to date financials, pitch deck, and a cap-table and review internally. We then soft-circle with the appropriate subset of lenders with whom we work to determine interest. Our goal is to bring multiple term sheets to clients whenever possible. We report our findings back to the client and make a recommendation to formally pursue terms or not. If we recommend moving forward and the client agrees, we formalize our relationship and get to work. Our team acts as an extension of yours for the purposes of securing your term loan facility. We endeavor to keep as much work off of your desk as possible and involve you only for updates and when necessary to move the process forward, calls with lenders, review of terms, etc.

Venture debt term loans are very flexible and provide clients the ability to hedge against both positive and negative market conditions. We’re currently sourcing term loans for a number of clients as this structure is the right fit for their needs. As always, please feel free to reach out to discuss this or any other topics of interest. All the best!


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