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October 31, 2023

Unlocking Private Debt for Fintech: 5 Tips from a Former CFO

Author:
Mark Bruny
Unlocking Private Debt for Fintech: 5 Tips from a Former CFO

So your fintech lending or payments company has proven its product-market fit and is now ready for hockey stick growth? Whilst finding debt capital investment is an essential part of the next phase of growth, navigating the private debt landscape can be a daunting task, especially for first-time borrowers. 

Drawing from my experience as a former fintech CFO, I've compiled five essential tips to help fintech companies successfully raise private debt. 

 

Be ready to demonstrate your track record, no matter how little there is 

Private debt investors seek companies with a proven track record of success. This means demonstrating a healthy portfolio of loans with a low default rate.  

Establishing a strong track record requires a consistent history of loan repayments. A minimum of 12 months of repayment iterations is generally considered a good starting point, however this is dependent on how many loan iterations, or repayment events, you have had. The shorter the tenor of your loans, the more iterations you will have over 12 months and the more confident private debt investors will be with your data as a predictor of future performance.  

Additionally, having the right processes, procedures, and a competent team in place further strengthens your credibility. 

 

Identify the right investors at the right time 

Not all private debt investors are created equal. Some focus on specific industries, others focus on impact, while others have broader investment mandates.  

Remember, just like your fintech business has criteria to make loans, private debt investors also have criteria so identifying investors who align with your company's stage, sector, and growth trajectory is crucial. If you're a relatively new company, consider targeting investors who specialize in early-stage fintechs.

Your existing VC investors can be an invaluable resource in this regard. They usually have networks of private debt investors who they connect you with and will be more attune to which investors would be more suitable for your company.  

In addition, you can attend industry events and keep up to date with industry press. Conferences are a great way to meet potential investors and learn about their investment criteria, whilst you can learn the names of potential debt investors through deal announcements from other similar fintech companies in your region. 

Also, don’t forget, the right debt investors will also be looking for you and you will be warmly received if you meet their investment criteria. So if you receive the cold shoulder from a private debt investor, it is likely you are not a fit for them so best to move on as a deal is unlikely to unfold. 

 

Embrace transparency and honesty 

Private debt investors are sophisticated and discerning. They can spot red flags from a mile away, so If you have any problems, be upfront about them. If you're open and honest with investors, they're more likely to be willing to work with you.  

If there are any potential issues or challenges, address them proactively. Open and honest communication builds trust with investors and increases the likelihood of a successful partnership.  

Besides, most early stage fintechs have the same issues so usually there is no need to worry.  

 

Demonstrate positive unit economics 

Private debt investors want to see that your company is generating profits from its lending activities. This means demonstrating positive unit economics, where the revenue generated from loans exceeds the associated costs. 

Positive unit economics indicate a sustainable business model and assure investors that their capital is being deployed effectively. This is even more important if your fintech is losing money on an accounting basis, as it shows the business will eventually be profitable once it scales.  


Organize your data effectively 

Private debt investors value efficiency and appreciate companies that present their data in an organized and easily understandable manner. This streamlines the underwriting process and allows investors to make informed decisions promptly. 

Private debt investors are not sitting around waiting for you to be ready, they usually have several active deals on the table at any given time. Like you, they are keen to make the best use of their time by transacting with those who are more likely to close. Taking 4-6 weeks to provide an incomplete data room will not impress any investor, conversely, having your information organized will usually move you to the front of the queue.   

Some additional tips

  • Be prepared to negotiate. Private debt investors are looking for a good return on their investment. Be prepared to negotiate on the interest rate, terms, and other aspects of the loan agreement
  • You should always have more than one iron in the fire... even if you do everything right, there's always a chance that you won't be able to raise private debt from a particular investor. For instance, during covid a number of investors froze funds for deployment meaning all deals were off for a while. Always have a backup plan in place in case this type of situation happens. 

 

Raising private debt can be a challenging process, but it's worth it if you can get the right deal. In the dynamic world of fintech, access to capital is the lifeblood of growth so make sure the effort matches the importance.  


Want to learn how Cascade can help you prepare for and navigate the process? Join our upcoming webinar or schedule a demo with our team.