Several companies involved in the energy transition or tech have recently shown how it’s possible to secure bank financing at an early stage of their development, disrupting conventional credit analysis frameworks. How have they been able to secure their initial bank loan early on? By effectively communicating on their credit story. Their success is also down to their in-depth understanding of how banks work and their ability to garner support within these institutions, as Sébastien Loison and Harald Aschehoug, finance consultants at Redbridge, discuss in this article.

If there’s to be a shift towards a more sustainable and environmentally friendly economy there needs to be massive investment: it’s been calculated that implementing the European Green Deal will require around €520 billion of investment per year between 2021 and 2030. While public authorities are providing support to hasten the transformation of key sectors of the economy, start-ups and innovative small- and medium-sized companies are still facing challenges in accessing private finance. The stakes are high, as they may need this funding – often within a tight timeframe – to execute their development plans.

And the way start-up growth companies can secure initial bank loan early is evolving. Traditionally, lenders have tended to provide support based on established activities – which are often limited for such companies – which means shareholders have generally been responsible for funding development. But at a time when investment in crucial social and environmental projects needs to accelerate, equity fundraising is slowing down. According to a report by Atomico in November 2023, total capital investment in the European tech ecosystem in 2023 looked set to reach $45 billion – far below its peak level in 2021, when it surpassed $100 billion.

Given the fluctuating nature of the equity fundraising, bank debt plays a crucial role in ensuring that growing companies can obtain the funding they need to carry on expanding.

How to persuade lenders to lend

Securing bank finance is generally challenging for companies that are still to prove that they can be profitable. Lenders often turn away such firms when they need substantial investment, even if their business model is transparent and their technology proven. Failures to raise debt in this way are typically kept private, but credit committees generally raise concerns like: “not convinced about the company’s ability to make a profit in the near future,” “too early in the company’s development,” or “isn’t this more the role of equity?”

Nevertheless, companies at the early stages of their development may approach a bank successfully before asset financing is in place if the projects they are involved in have attained a certain level of maturity and the primary development and profitability risks they are exposed to have been mitigated. Recently, a number of companies involved in the energy transition and tech have managed to secure funding by showcasing their ambition, methodology, and transparency. They have done this by making clear the key elements of their credit story. It is also thanks to their in-depth understanding of how banks work and their ability to garner support within these institutions.

Much like a compelling equity narrative is vital when raising equity capital, a company looking for bank financing needs to develop a credit story that is realistic, well-argued and impactful. It must also set out how it will be able to repay the money it wants to borrow based on the company’s capacity to grow and settle or refinance the loan in the medium term. Banks are rarely willing to provide borrowers with a window of longer than two years to generate a positive profit.

All this means that a company’s underlying technology needs to be operational and have entered the commercial and industrial deployment phase. Biotech companies, which predominantly use the money they raise in product development, are for this reason excluded

Bankers also generally stipulate that the company’s initial liquidity needs must be covered by the equity they have already raised, with bank debt seen as a complement to equity. As such, a well-planned timetable for raising both equity and debt is vital.

To ensure the business plan is credible, the application must provide evidence that the company is moving towards sustainable profitability by including detailed information on the company’s projects, with a focus on their maturities and execution risks. This kind of detail enables banks to assess the company’s capacity to repay its debts.

The importance of optionality and assertiveness

Another crucial aspect of a business model – and one that is often overlooked in credit analysis – is the value of optionality; specifically, a management team’s capacity to adjust its strategy. This optionality might involve slowing some investments to preserve liquidity or welcoming new investors to finance assets under development and meet cash requirements. Although they are not always easy to quantify, such options strengthen a company’s credit profile by providing a safety net to banks in the event of a company’s business performance deteriorating.

While the most mature projects may secure growth through non-recourse asset financing, while the various layers of future financing and their legal security structures becomes imperative. When it comes to the financing of holding companies, it’s important to explore other mechanisms to reassure lenders, such as providing enhanced visibility over flows returning to the holding company, partial early repayment mechanisms, and control of the portfolio of projects under development.

It’s also important to be creative when it comes to the credit framework. For growing companies with negative or low EBITDA, conventional covenants such as leverage are likely to be either ineffective or excessively restrictive. To help banks track the pledge while preserving operational flexibility, it is better to use indicators like recurring annual revenues, sales volumes or the physical deployment of infrastructure.

Even though borrowers may not be in a strong negotiating position with banks, it is nonetheless crucial to be assertive about the structure of the loan taking into account factors like its term, maturity schedule, covenants and undertakings to perform and not to perform. This is especially pertinent in the case of an inaugural loan as it will serve as a benchmark for subsequent loans. The financing margin must be assessed against other, potentially more costly financing options.

Mixing lender profiles

Lenders’ appetite to provide funding is linked to the potential to do business with a company in the future. Activities such as cash management, cash flow, sureties and guarantees, asset financing, interest rates, foreign exchange hedging, equity financing, or, in some cases, wealth management for the company’s founders – all these commercial levers can effectively engage competition amongst potential lenders.

It is evident from Redbridge’s recent advisory deals that the most successful outcomes for companies seeking funding are achieved by combining regional banking networks, which are responsive to the opportunity to bolster development in their territories, with global investment banks that are more interested in ancillary business opportunities.

For early-stage companies seeking bank financing, advisors have an important role to play in reassuring lenders, crafting the credit story negotiating the best possible terms and conditions, and helping the company understand the way that banks think and work. Meticulous preparation of the application before entering any discussions with lenders maximizes a company’s chances of obtaining the financing it needs to secure its growth momentum.


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