When unit economic stability has been found, a company’s credit capital markets attention should start to shift away from flexibility and towards scalable solutions and cost of capital. At this stage, a Company should have a handful of FTEs fully dedicated to managing asset generation, underwriting and capital markets. This may be the first time that the Company can access scalable capital markets at a cost of capital that improves gross margin.
What Matters?
Scalability: It will be important to find a partner that has the ability to scale with you through your projections for the next few years. A significant amount of time and set up costs will be spent and the longer the relationship the longer the cost will be able to be amortized over. The firm's industry expertise, flexibility, simplicity of doing business, value additions, collateral requirements, guarantees, fees, penalties, effective advance rates, and effective interest rates are some of the variables that should be taken into account throughout your selection process.
Cost of capital: At this point the Company is probably able to access a lower cost of capital facility (larger facilities generally equal lower cost of capital). Improving gross margins will usually be key conversations on the equity side and improving cost of capital is one easy way to help achieve those goals.
What to Avoid
Unclear expansion metrics: Find a lender that can provide all the capital needed on day one, or at least very clear metrics needed to unlock further capital. For Companies that have nailed PMF and start to see exponential growth, having to negotiate for more capital while the company is desrisking is not a strong position to be in.
Not understanding deeply who the capital provider is: where does the capital come from? How stable are they? How are they structured in terms of pockets of capital if they have multiple (which could affect how much capital is available to your business).
