Why Good Deals Turn Bad in Early-Stage Debt Financing
At Capital Advisors Group, we have advised hundreds of early-stage companies on billions of dollars of debt transactions over the past 17 years. We’ve learned that every deal is different, and every company’s capital structure is unique. But one thing never seems to change: even the best-laid plans can go awry. Over the years, we have witnessed countless examples of good deals turning bad.
Debt financing deals go south for all kinds of reasons, from pursuing too much leverage, to miscalculating the size, scale, and timing of an equity raise, to missing projected revenue numbers in the middle of a deal, and more. The good news is that there are plenty of ways to avert the most common pitfalls that can send a transaction spiraling off in the wrong direction. Our March white paper, Understanding Early-Stage Debt Financing: Why Good Deals Turn Bad, lays out some of the most common reasons a debt financing transaction may fail to come to fruition. And it provides practical advice on how to help keep a deal on track.
Among other things, it explains why a thorough understanding of the debt financing process can help avoid problems. If you’re an early-stage company burning cash and preparing for the next round of venture capital, you can extend your cash runway with an appropriate level of debt. And because debt doesn’t dilute your equity stake, it can deliver some longer-term benefits.
But often lenders, who are fundamentally conservative, may be wary if early-stage company founders, who tend to be inveterate optimists, present them with overly optimistic growth projections. A solid business plan, a realistic revenue forecast, and a commitment to right-size your balance sheet with an appropriate equity raise can help alleviate their concerns.
There are many types of lenders and structures in the market. Seeking them out as you competitively source your deal can help get the best terms. It can also increase the odds that you find a like-minded lender who believes in your business and supports you over the long term.
But these are just the highlights. To learn more about successfully navigating a debt financing transaction while avoiding the many potential wrong turns that may throw you off track, download our white paper today.