Mini-Guide: Preparing for Private Credit

In an era where traditional bank lending has become increasingly restrictive, private credit financing has emerged as a powerful alternative for businesses seeking capital. This form of financing, provided by non-bank lenders such as private equity firms, family offices, and specialized credit funds, offers greater flexibility, potentially larger loan amounts, and often a more personalized approach to underwriting.

But with greater flexibility comes greater scrutiny. Private credit providers dive deep into your business’s finances and operations before making a decision. This mini-guide will walk you through the essential steps to prepare for this diligence and strengthen your business.

1. Financial Health Check

Before you even think about approaching private credit providers, you need to put your financial house in order. This isn’t just about having your numbers ready; it’s about understanding the story those numbers tell about your business.

Key financial metrics private credit providers tend to focus on include:

• Profitability: Usually depicted as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or Free Cash Flow. You don’t always have to be profitable to unlock the capital, but it certainly helps.
• Cash Flow Stability: Lenders want to see consistent, predictable cash flows. If your cash flow is volatile, be prepared to explain why and how you manage it.
• Debt-to-Equity Ratio: This shows how much your business is leveraged. A high ratio isn’t necessarily bad, but you’ll need to justify it.
• Working Capital: This indicates your short-term financial health. A positive and growing working capital is a good sign.
• Revenue Growth Trends: Steady growth is ideal, but even if your growth is uneven, be ready to explain the factors behind it.

Pro Tip: Don’t just calculate these metrics—benchmark them against your industry standards. If your EBITDA margin is 15% in an industry where 10% is the norm, that’s a compelling story to tell.

2. Bulletproof Your Business Plan

This is your chance to paint a vivid picture of your company’s future. Here’s some key things to include:

• Growth Projections: Be ambitious but realistic. Back up your projections with market data and your historical performance. For example, if you’re projecting 20% year-over-year growth, show how you’ve achieved similar growth in the past or point, or be able to reasonably speak to how you plan to achieve that.
• Use of Funds: Be specific. Are you bringing on more engineers to accelerate your product roadmap? Are you investing in marketing for more aggressive customer acquisition? Maybe you’re looking to acquire a competitor to streamline growth. Speak to your plan. 
• Strategic Initiatives: Outline clear, actionable plans. For instance, “Implement a new CRM system to improve customer retention by 15% over the next year.”
• Risk Mitigation: Show you’ve thought about what could go wrong and how you’ll handle it. This demonstrates maturity and preparedness to potential lenders.

Pro Tip: Consider creating a “base case” and an “upside case” scenario. This shows lenders you’re prepared for different outcomes and helps them understand the potential upside of investing in your business.

3. Have Your Data Room Ready

Organization is key when it comes to documentation. Here’s what you need and how to present it:

• Financial Statements: Provide balance sheets, income statements, and cash flow statements for the past 3-5 years.
• Tax Returns: Include both business and personal returns (for smaller businesses) for the same period as your financial statements.
• Customer and Supplier Contracts: Highlight any long-term contracts that provide stable revenue or cost structures.
• Debt Schedule: Detail all existing debt obligations, including terms and covenants.
• Management Team Bios: Showcase the experience and expertise of your leadership team.

Pro Tip: Organize documents into clearly labeled folders and provide a table of contents. This level of organization speaks volumes about your professionalism and attention to detail. There are a number of affordable tools like Dropbox or Google Drive that you can use for your data room.

4. Choosing the Right Private Credit Partner

Remember, you’re not just looking for money—you’re looking for a financial partner. Here are some factors to consider:

• Industry Expertise: Some lenders specialize in specific sectors. A lender with experience in your industry can provide valuable insights and may be more understanding of industry-specific challenges.
• Structures: Private credit offers flexibility. Some lenders might offer interest-only periods, others might provide revolving credit facilities. Understand what structure best fits your needs.
• More Than Money: Look for lenders who offer more than just capital. Some private credit firms have operational expertise or valuable networks that can help grow your business.

Questions to ask potential lenders

• How do you typically structure loans for businesses in our industry and stage?
• Can you share case studies of how you’ve supported businesses through challenging times?
• What operational or strategic support do you offer beyond capital?
• How do you approach covenant setting and monitoring?

Preparation can be Your Competitive Advantage

In the world of private credit, thorough preparation isn’t just about checking boxes—it’s about positioning your business as a compelling investment opportunity and setting up your business for long-term success.

Start this process well before you need the capital. The insights you gain can drive improvements in your business, making you stronger regardless of whether you ultimately pursue private credit financing. Remember, in this process, you’re not just a borrower—you’re a partner that lenders want to invest in. Show them why your business isn’t just a good bet, but a great one.

Need help preparing materials or finding the right partner for your growth objectives? Schedule a free discovery call with our Capital Advisory team to explore your options.