Due Diligence and Borrower Transparency are Key to Debt Funding

In an ideal world, business owners seeking to raise debt capital would approach potential lenders well in advance of the money being required. That’s not always possible, of course. Opportunities arise that may require debt funding. Less positively, a business may fall victim to an unexpected event – such as the collapse of a major client – that may, in turn, trigger a requirement for additional funding over the short or medium term.

But the truth is that negotiating and finalising a deal can take many months. This can be particularly true in the case of bank finance. The journey starts optimistically, typically with a relationship manager assessing an initial approach before passing it onto colleagues. If the funding requirement is significant or complex – or perhaps, both – it will then be assessed again by specialists at the bank, and this is followed by intensive negotiations with the customer. Once a deal is broadly agreed, it will go in front of an independent credit committee for final approval. In other words, an application for finance will go through a number of stages, over a period of months, and the deal can fall apart at any point. It can be a frustrating process.

Faster Decisions

The same principles of assessment, due diligence and sign off apply to debt funding via market lending platforms, but there is a difference. Yes, time is required, but decisions can often be made more quickly than would be the case with a traditional bank lender. In addition, the customer often benefits from a more responsive service.  

That’s certainly the case at The Route – Finance. As Head of Legal and Due Diligence, Alex Innes puts it:  “The main strength of Route Finance is that it is quite a small team, and that greatly shortens all lines of communication for us internally. We’ve also got a lot of experience in that team. We’ve got a senior underwriter who’s worked at a mainstream bank. I’ve got over 30 years experience as a finance lawyer and I’ve also worked at a mainstream bank. Combining that technical experience within a small team, gives us, I think, a great market advantage when dealing with borrowers.”

 

Put simply, the presence of a small experienced team enables decisions to be made quickly and – equally important – team members are available to the borrower to answer queries. These factors contribute to the development of a relationship of trust between the parties.  

Bumps in the Road

But if a debt funding deal is to move rapidly from initial application to completion, it is vital to ensure that trust is underpinned by a high degree of transparency on the part of the borrower. The team at the lending platform needs to understand not only the borrowing requirement but also the circumstances of the business in question. Alex Innes cites the perspective of The Route – Finance: “From our point of view, we want to completely understand the deal, and if we do that we can best make the deal work, which also helps the borrower as well, but I think as I said, it’s very important to have full disclosure. If we uncovered something at a later date that was quite material that will become a more difficult transaction to do,” he says.

In Practice

What does that mean in practice? Well, there are a number of factors to consider. From the perspective of The Route – Finance, cash flow is of key importance. Any figures provided by the company should be accurate and projections need to be sanity checked and realistic. It’s important, also, to provide robust information on the value of assets, such as property. Many of The Route – Finance’s investments are in the property development sector, with loans repayable over relatively short terms, so the team will look carefully at the borrower’s proposed exit.  

Providing all the necessary information will require preparation – underlining the need for as much pre-planning as possible on the part of the borrower – but assuming that the figures are robust, it should be possible to proceed quickly with the assessment and due diligence process.

The Investor Perspective

The speed of the process is something that investors pay close attention to. The Route – Finance’s community of investors comprises High Net Worth individuals, family offices and institutions. They pre-commit capital to the platform, meaning that money is always available – it doesn’t have to be raised on a case-by-case basis. Their willingness to commit funds is based on trust in The Route’s approach to due diligence.

There is, therefore, a symbiosis in this three-way relationship. The trust that is established between The Route – Finance and businesses raising capital is central to ensuring that viable projects get the debt funding they require within a suitable time frame. And by underpinning that trust with effective due diligence, The Route – Finance has attracted a growing community of experienced investors.

To find out more about The Route – Finance’s Private Debt Platform, call 020 3141 9040

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