The Ins and Outs of Refinancing Debt
During conversations with clients who indicate a need and interest in securing a new loan, it’s common to discover they already have an existing facility. This can be in the form of a previously acquired loan for working/growth capital from a venture debt fund, a line of credit or another facility from a venture debt bank. Once the existing debt is identified, we need to dig a little deeper to determine how this impacts the client’s current request. Following I’ll share the information we need to determine next steps.
Who is the debt provider?
We’re likely familiar with them and their terms and structures, and this information will help us determine what additional questions we may need to ask.
Are you open to refinancing the debt?
In some situations clients will have existing facilities they wish to keep in place - an existing bank line of credit for example. While this certainly acceptable, if a client is unwilling to consider refinancing existing debt, this could complicate or end the process. The existing debt is almost certainly senior-secured. While we have a few lenders who will take a second lien position, many will not and this drastically reduces the options available.
What was the original size of the facility and the current balance?
Venture debt lenders want to ensure their capital will be used to drive growth that will in part fuel repayment. Depending on your revenue, projections, etc. lenders will limit the size of their offerings accordingly. If you qualify for a $3MM facility and you’re currently carrying $3MM in existing debt, it’s going to be a no. Rarely are lenders interested in a straight refinance with no new growth capital
What are the current repayment terms?
Is the loan currently P&I repayment or in an I/O period? If I/O, for how long? This information can significantly impact projections and modeling of debt service by lenders considering refinancing current debt while providing additional growth capital.
Have you discussed this request with your existing lender?
This one is important for a couple of reasons. First, if your existing lender is willing to fund your need, this solution is typically the most straightforward. You have history and provided it’s positive, working with your existing lender is usually the path of least resistance. Also, we need to understand with whom you’re in current discussions regarding a new facility. The all in cost of paying an advisor to source debt vs. working with your existing lender is usually more expensive. We don’t want to waste your time or ours if you have an existing solution. We will happily advise you to not engage us in that instance. In many cases, particularly with venture banks these days, existing lenders either aren’t interested in lending additional capital or the client is dissatisfied with the relationship. We’re very successful working with clients in this situation.
As always, feel free to reach out to me with questions or to discuss further.