Raising debt with flexible covenants

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management

2 years ago

We have a business under LOI. In the first 2 years of ownership, this business will need internal investments to finance an update of the technology stack (this will be mostly classified as capex). To this end, we'd like to have some flexibility in our debt documents to allow us to fund these investments from our cashflow. Perhaps there is either covenant relief for first 24 months or ability to PIK the interest for some time. 

It would be great to connect with someone who raised debt on these terms OR someone who works at a capital provider who is comfortable with funding a debt structure like this?

My sense is that traditional banks have a tougher time doing non-standard loans but I welcome folks' thoughts on that front as well (are there banks who'd be open to flexibility?)

Thank you!

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searcher from University of California, Berkeley - Haas School of Business

Bank debt will always look for 2-3 sources of repayment: CF, collateral and PG (or some other form of backstop if #1 and #2 fails). SBA lenders are more lenient bcos of the Gov't backstop. Not sure what you mean by "flexible" but all coveys are going to make sure you don't default. But each lender will likely "structure" a deal slightly different but with the same goals I mentioned above. Flexible is available but not from traditional banks. Thats the role direct lenders play but flexibility comes with a cost.

2 years ago | like reply | 0 likes

lender from Eastern Illinois University

There are options available. If you use and SBA 7A loan to acquire the business, the Bank will underwrite future CAPEX needs into the deal, but once approved you typically will not have any covenants on the loan that would restrict how you make those investments. You could also look to get a secondary line of credit or build into the SBA loan enough capital to cover those investments. Of course to do all of this you would largely need to stay under the $5 million SBA limit or if slightly above get a lender to do a second conventional loan. If you are looking for conventional financing, then there are ways to build in flexibility and negotiate the deal that way on the covenant side. Again, you might also be able to get some of those capital improvements financed so long as there is cash flow to support it. I would be more than happy to discuss the specific details on your request and provide more specific guidance. We are a Commercial Loan Brokerage firm with over 350+ funding partners, including many banks and credit unions. You can reach me at --@----.com Thank you.

2 years ago | like reply | 1 like

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