Negotiating a growth debt facility

The best growth debt negotiation is not a contest to win the lowest interest rate. It is an exercise in making sure the facility delivers usable cash, at the right time, without creating restrictions or repayments the company cannot comfortably manage.

Venture debt lenders price and structure risk in different ways. If you push down one term, the lender may seek protection elsewhere. A cheaper margin can come with tighter covenants; a longer interest-only period can come with a larger fee or warrant. The aim is a balanced package that still works in a reasonable downside case.

Negotiate while the company is strong

Borrowers usually have more leverage shortly after an equity round, when cash runway is healthy and several lenders are interested. Waiting until cash is short reduces choice and makes the timetable itself a source of pressure.

Start early enough to run a proper process. A credible alternative, including the option not to borrow, is often the most useful negotiating leverage.

Define what the facility must achieve

Before discussing terms, agree the financing objective with the board. Is the debt intended to extend runway to a specific milestone, fund an acquisition, provide a safety buffer or support working capital?

Translate that objective into five numbers:

• the cash genuinely needed;
• the latest useful drawdown date;
• the milestone the cash should help reach;
• the monthly debt service the business can support; and
• the minimum cash runway the board will protect.

This prevents a large headline commitment from distracting you from whether the money will be available and affordable when needed.

Create competition before exclusivity

Where possible, obtain more than one term sheet and compare them on the same assumptions. Lenders know that a competitive process gives the borrower choices.

Do not sign exclusivity too early. A term sheet may be mostly non-binding, while its exclusivity clause can stop you speaking to other lenders. Keep the period proportionate, link it to a realistic documentation timetable and understand any lender costs payable if the transaction does not close.

Put the important terms in the term sheet

The term sheet is normally the point at which the borrower has the most commercial leverage. Avoid leaving material points to be described only as customary or subject to documentation.

Ask for clarity on facility availability, drawdown conditions, repayment, covenants, security, prepayment, warrants, fees, events of default and any required banking relationship. Detailed loan documents should reflect the agreed commercial deal, not introduce a new one.

Facility size and usable cash

A £10 million facility is not worth £10 million if only £4 million is available at closing and the rest depends on a milestone the lender can judge subjectively.

For each tranche, negotiate:

• the amount and final drawdown date;
• objective conditions that the company can control or measure;
• what information must be delivered;
• how quickly the lender must confirm satisfaction; and
• whether a missed milestone permanently removes the commitment.

Avoid paying full commitment fees or calculating warrants on money the company may never be able to draw. If the business needs certainty, a smaller firm commitment may be more useful than a larger conditional offer.

Interest is only one part of price

Compare the margin and the underlying base rate, but also model arrangement fees, commitment fees, exit fees, legal costs, default interest, prepayment charges and warrants.

Ask whether fees apply to the total commitment or only to amounts drawn. Check when each fee becomes payable and whether tax or expenses sit on top. Calculate cash paid under your expected case and at least one downside case; a single annual percentage will not capture the whole cost.

Repayment shape matters more than maturity

A four-year maturity can sound comfortable, but the cash pressure may begin much earlier when the interest-only period ends and principal amortisation starts.

Model the monthly cash movement from first draw to final payment. Negotiate for an interest-only period that reaches beyond the milestone the facility is funding, with room for delay. If tranches are drawn at different times, clarify whether each receives its own interest-only period or shares one facility-wide schedule.

Longer interest-only terms reduce near-term cash outflow but can leave more principal outstanding later. The right answer depends on the company's expected cash generation, equity timetable and refinancing options.

Covenants need operating headroom

A financial covenant is a test the company must continue to pass, such as minimum cash, minimum revenue or a limit based on remaining runway. Negotiate against a downside forecast, not the board plan.

The company should be able to absorb an ordinary miss without immediately needing a waiver. Ask how the figure is defined, how often it is tested, whether cash must sit with the lender and whether new equity can cure a shortfall.

Reporting covenants matter too. Deadlines should match the finance team's actual close process, and the lender should receive information the company can produce accurately and consistently.

Preserve room to run the business

Negative covenants restrict actions such as taking on more debt, granting security, making acquisitions, selling assets, paying dividends or moving cash between group companies.

Do not negotiate each restriction in isolation. Build a list of actions the company may reasonably need during the loan term and make sure the permitted baskets, thresholds and consent processes accommodate them.

Consider planned equipment finance, corporate cards, leases, acquisitions, reorganisations, new subsidiaries and future fundraising. A restriction that looks harmless on signing day may become expensive when the business changes.

Security, intellectual property and banking

Growth debt is commonly secured. The lender may seek security over most company assets and sometimes intellectual property, bank accounts or shares in subsidiaries.

Understand what is included, which group companies must guarantee the debt and what happens in every country where the group operates. If intellectual property security is included, ask what registrations, controls and enforcement rights follow.

Some lenders require operating accounts to move to them or cash to be held in controlled accounts. Treat this as an operational and concentration decision, not paperwork. Negotiate transition time, permitted accounts, local exceptions and access to cash while no default exists.

Warrants are part of the price

A warrant gives the lender the right to buy shares later at an agreed price. It can create dilution, so model it alongside cash fees and interest.

Clarify whether the warrant is based on the committed amount or the amount actually drawn, which class of shares it covers, the exercise price, expiry date and treatment on a fundraising, sale or initial public offering.

If the lender will not reduce the warrant, consider negotiating it down when less debt is drawn, when the facility is repaid early or when defined performance milestones are met.

Prepayment and refinancing

The company may want to repay early after an equity round, a sale or a cheaper refinancing. The lender may seek compensation because early repayment shortens its expected return.

Negotiate a clear declining prepayment schedule. Check for minimum interest, make-whole amounts, exit fees and mandatory repayment on an asset sale or change of control. Ask whether charges are waived when refinancing with the same lender.

Flexibility to repay is valuable even if management currently expects to keep the facility to maturity.

Events of default and cure rights

Ask which events give the lender additional rights and which have no cure period. Common areas include non-payment, covenant breach, misrepresentation, insolvency, cross-default and material adverse change.

Seek reasonable cure periods, materiality tests and monetary thresholds. Where possible, keep subjective triggers narrow and linked to a serious effect on repayment. The negotiation should also cover the default rate, drawstop rights and the lender's ability to accelerate the loan.

Trade price for the flexibility you value

Not every term deserves equal effort. Rank issues as essential, valuable or acceptable. Then make trades rather than sending an undifferentiated list of objections.

For example, a company that expects another equity round in 18 months might value low prepayment costs and covenant headroom more than a slightly lower margin. A company funding a regulatory milestone may value tranche certainty and a long availability window above almost everything else.

Explain why a requested change improves the credit. A later amortisation start may allow the company to reach cash generation; an objective tranche condition removes a future dispute; realistic reporting deadlines produce better information.

Use a single issues list

Maintain one live document showing each open point, the lender proposal, the company request, the reason and the owner. Include the economic terms and the legal drafting in the same decision process.

A simple order of work is:

1. 1Agree the financing purpose and downside limits internally.
2. 2Compare competing term sheets on normalised assumptions.
3. 3Resolve material economics and structural terms before signing exclusivity.
4. 4Ask experienced counsel to review the term sheet before signature.
5. 5Track every agreed point into the long-form documents.
6. 6Re-run the cash model against the final documents before closing.

Due diligence goes both ways

Assess how the lender behaves after closing, not only how it prices the deal. Speak to borrowers that performed well and borrowers that missed plan.

Ask who makes amendment decisions, how quickly consents are handled, whether the loan may be transferred and what happens when the relationship manager changes. A responsive lender can be worth more than a small pricing difference when the company needs a waiver or acquisition consent.

Common negotiating mistakes

• Focusing on the interest rate while ignoring fees, warrants and repayment timing.
• Accepting a large facility whose later tranches are not genuinely available.
• Using the management case, rather than a downside case, to set covenant levels.
• Signing exclusivity before the important commercial points are clear.
• Leaving events of default and operating restrictions to long-form documentation.
• Failing to model early repayment or a delayed equity round.
• Treating every point as equally important and spending leverage on immaterial wording.

The bottom line

A good negotiation produces a facility the company can use in both the expected case and a credible downside case. It should provide enough cash, preserve room to operate and avoid a repayment profile that undermines the milestone it is meant to fund.

Negotiate the structure before the documents become long and the timetable becomes urgent. Compare total economics, protect flexibility and make deliberate trades. The cheapest-looking venture debt offer is not necessarily the one that creates the most value.

Where to go next

• Comparing growth debt term sheets provides a like-for-like framework for evaluating offers.
• Growth debt term sheets explained shows how to read the whole offer before long-form documents.
• Warrants and equity kickers in growth lending explains lender equity rights and potential dilution.
• Growth debt repayment structures compares interest-only periods, amortisation and maturity structures.