Diligence Best Practices + Operational Cost and Requirements

Asset backed facilities can deliver tremendous value to a Company, but often take even more time and money to set up than working capital facilities.

Because the lender main source of recourse is to the assets themselves and return of principal is the most important goal, the lender will want to deeply diligence the following topics across the company and assets before engaging in any transaction:

• Scale: the lender’s capital will only be put to work if the assets can scale. Origination velocity, unit economics, and infrastructure typically drive the evaluation of scale.
• Performance: the lender could be at risk of losing capital if the assets underperform vs. expected performance levels.
• Operational Risk: adequate guardrails must be in place to ensure no fraud or operational errors cause any degradation of value accidentally.
• Reporting: the Company must ensure that accurate information be delivered in a timely manner so early warning signs can be put into place and properly detected if necessary.
• Licensing & Regulatory Compliance: verifying appropriate licensing and ensuring regulatory or governmental compliance is critical for AB lenders. Regulatory or governmental issues could result in a diminished asset value or a prolonged standstill period filled with uncertainty. This may restrict the Lender’s ability to earn interest on their deployed capital, ensure full return of the principal balance and slow down redeployment of capital (and therefore depress returns for the Lender).