Choosing the right financing partner is one of the most critical decisions a company makes. Beyond pricing and terms, the relationship with your lender can significantly impact operational flexibility, growth trajectory, and long-term success. This guide provides a structured approach to evaluating potential financing partners.
Key Evaluation Criteria
1. Sector Expertise
Lenders with deep industry knowledge understand your business model, risks, and growth drivers.
Key Questions:
- • How many deals have they completed in your sector?
- • Do they have dedicated industry coverage?
- • Can they provide relevant references?
- • What is their track record through cycles?
2. Relationship Approach
Assess whether they view you as a transaction or a long-term partnership.
Partnership Indicators:
- • Proactive communication
- • Flexible during challenges
- • Strategic guidance offered
- • Network introductions
Red Flags:
- • High portfolio manager turnover
- • Inflexible covenant interpretation
- • Limited availability
- • Overly aggressive monitoring
3. Terms & Structure
Beyond pricing, evaluate covenant packages, reporting requirements, and operational constraints.
| Factor | What to Assess |
|---|---|
| Covenants | Cushion, flexibility, testing frequency |
| Reporting | Frequency, detail required, systems needed |
| Amendment Process | Speed, fees, decision-making authority |
| Prepayment | Penalties, timing restrictions, portability |
Due Diligence Checklist
Lender Background
- Fund size and dry powder available
- Parent company stability
- Team tenure and experience
- Portfolio composition
- Default/workout history
- Regulatory status and compliance
Reference Checks
- Speak with 3-5 current borrowers
- Contact companies in workout situations
- Check with PE sponsors
- Verify claims with advisors
- Review online reputation
- Ask about surprises post-close
Red Flags to Watch
Overly Aggressive Terms
Covenants that leave no room for operational volatility or unrealistic projections
Lack of Industry Track Record
First time in your sector - you'll educate them at your own risk and cost
Poor References
Difficulty providing references or negative feedback from current borrowers
Unclear Decision Process
Multiple approval layers or frequently changing credit officers
Excessive Monitoring
Disproportionate reporting requirements relative to facility size
Making the Decision
Beyond the Lowest Price
While pricing matters, the cheapest option is rarely the best choice. Consider:
- • Total cost of relationship (fees, covenants, flexibility)
- • Long-term partnership value (growth support, add-on capability)
- • Operational burden (reporting, compliance, management time)
- • Risk profile match (lender's risk appetite vs. your business model)
Related Insights
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