Business diligence background
The rise of financial technology, or fintech, has been one of the most exciting trends in technology over the past decade. Companies like Affirm, SoFi, and Opendoor have fundamentally changed the way consumers obtain educations, buy homes, and finance everyday purchases.
One key to the rapid growth of fintech has been the strategic use of debt capital as a way to fuel company expansion. There are two ways to raise capital: debt and equity. Equity is fairly simple. When you see offers to buy 10% of a company on Shark Tank, you’re seeing an equity offer in action: an agreement to purchase a stake in a company at a predetermined price. But debt capital, especially in the fintech context, remains opaque and hard to understand.
The global fintech market is larger than $7 trillion, yet there remains very little information online about asset-backed finance, which is the type many fintechs rely on in order to scale, and, unless you’ve worked in or have expertise in capital markets, you’re unlikely to understand just how important it is to get it right.
Many promising fintechs realize too late that raising and managing debt capital is just as critical to their success as finding and retaining customers. After all, if you can’t access funding when you need it, you’re likely to see your growth stall. That’s why we put together this debt capital raise checklist for business diligence. If you go into your debt capital raise with the right knowledge and expectations, you’re much likelier to accelerate the raise process and streamline the transition to debt capital management.
When you raise debt capital, you're likely to encounter four types of capital provider diligence: Company overview information; Financial information; Origination, risk, and servicing information; and Data requests. Here's what capital providers may ask you to produce and explain:
Company overview information
- Company presentation and marketing materials (e.g., one-pagers)
- Org chart and overview of management team
- Requested debt capital amount and use of proceeds
- Full capitalization and ownership breakdown, including history of equity invested to date
- Historical financial statements since inception (balance sheet, cash flow statement, income statement)
- Projected 3-year capital needs and capital raise timeline
- Projected 3-year financial or operating budget
- Tax returns since inception
Origination, risk, and servicing
- Overview of credit / risk teams and reporting structure
- Overview of servicing team and reporting structure
- Description of third party and involvement of tech vendors for banking, payment processing, billing, and cash controls
- Summary or diagram for disbursements and remittance of cash by funding and collection entities
- Sample loan tape
- Customer approval and underwriting policy
- Overview of fraud, charge-off, and recovery policy
- Representative contracts or documentation for customers
- Portfolio summary by borrower or customer profile (FICO, demographic, other available information)
- Customer origination history and repayment history to date
- Customer loss history to date—losses, delinquencies, recoveries—with management commentary for each loss event
- Unit economic analysis for each receivable by expected yield, losses, prepayments (if relevant), servicing and target cost of capital
The debt capital raise process is one of the most important fundraising events for early stage and growth stage fintechs. By familiarizing yourself with the key due diligence documents that capital providers expect to see, you can put together the right team and process to make sure debt capital fundraising goes according to plan.
If you're interested in learning more about technology that can streamline your debt capital raise and management, just request a consultation with a debt capital expert. We'd love to chat!