Fintech founders face all the usual startup challenges: finding early customers, securing investments from angel investors and venture capital firms, and executing on a go-to-market strategy in the face of large, well-established competitors.
But they also face a number of fintech-specific issues, such as having to navigate a highly regulated space with a limited compliance and legal budget, and a lack of readily available information on how to think about the capital markets. One of the most important topics in this category is capital strategy, or how best to raise the right combination of debt and equity—and when.
We've spoken to hundreds of fintech founders about debt capital, and we've noticed they often make one of two mistakes: they either overestimate the importance of debt capital to their business (leading to undue stress) or underestimate how vital debt capital is for their growth (leading to stagnation and poor financial planning).
Here, we'll talk about the 4 key debt capital questions that fintechs face, provide recommendations for the resources we've found most helpful, and suggest a few ways to start putting together your fintech startup's debt capital plan.
Question 1: Do I need to raise debt capital to fund my fintech?
Fintech is, of course, financial technology, but the category includes a number of different types of companies. Broadly speaking, all fintech companies try to make it easier, faster, or less expensive to access financial services.
Fintech spans software, lending, infrastructure, business-to-business (B2B), and business-to-consumer (B2C). Some fintechs build mobile apps to help consumers save or manage their money. Others try to help traditional financial institutions improve their underwriting policies or risk management.
Fintech is deceptively broad; even businesses that appear to be in spaces unrelated to financial services—restaurant or construction management, for example—often decide to explore business opportunities like payments or spend management as they grow. The ubiquity of fintech means that "fintech joins the internet, cloud and mobile as the fourth major platform technology."
In the same way that it seems redundant to call technology companies internet, cloud, or mobile companies (for the most part), it may one day seem obvious that all VC-backed companies should have a fintech component. That means your startup may eventually fall under the fintech umbrella—even if you're starting in a totally different space!
While it's not a perfect heuristic, the best way to determine whether you need debt to fund your startup is to first identify whether your startup is particularly working capital-intensive (relative to other startups). A lending fintech that needs to disburse millions in loans monthly is capital intensive, while a financial advice fintech that releases a mobile app is not capital intensive.
The takeaway: if your fintech plays a direct role in helping customers access capital (e.g., credit card or property technology fintechs), it will likely be capital-intensive and you may need to raise debt in order to scale. If your fintech focuses exclusively on software, debt is probably optional or unnecessary.
Question 2: How long does it take to raise debt capital?
Okay, so you've determined that your fintech will likely need to raise debt capital in order to grow. How long will the debt raise process take?
Anywhere from 1-2 months for convertible debt (see Y Combinator's guide to venture debt) to 6+ months, for a senior revolving credit facility. As we cover below, however, the due diligence and negotiation portions of a debt raise often take longer than startups anticipate.
Timelines for raising debt can vary widely, but they depend primarily on the type of debt you want to raise and the type of capital provider you want to raise from. The more risk a capital provider has to take on, the more due diligence they'll want to conduct. (Interestingly, the size of the debt raise doesn't matter as much you might think. Low-risk or well-established companies can raise large amounts of debt quite easily.)
We previously covered how fintechs can fund early loans, and the same broad principles from that piece apply to fintechs (or even startups more broadly) considering debt as a means to fund growth.
The takeaway: However long anyone tells you it will take to raise debt capital (including us), tack on at least a few months of buffer to ensure you don't see business slowdowns.
Question 3: What does capital provider due diligence involve?
Capital provider due diligence is the process of vetting borrowers to make sure that their company financials, processes, and business history all fit the requirements of the capital provider.
When fintechs go to capital providers to access debt capital, they're sometimes surprised to learn that they have to provide more information than just their company financials.
Debt capital providers want to know that their investments will be repaid, of course, but they also want to make sure that they understand the borrower's business history, standard operating procedures, and business model.
Over the course of the debt capital due diligence process, borrowers might be asked to provide everything from tax returns to a list of technology vendors to a customer reference list. The four main types of capital provider due diligence are company overview information, financial information, customer or policy information, and historical data (this is especially important for fintech lenders).
For more, check out our previous article on capital provider diligence.
The takeaway: Accessing debt capital often requires extensive due diligence. Apart from requiring a major time commitment from all stakeholders, this process may also require your company to generate historical data in report formats that your current systems don't support. Plan accordingly!
Question 4: How can I make the most of my debt raise?
Debt capital compliance is the process of making sure that a borrower follows all the rules laid out in a capital provider credit agreement. The three main aspects of debt capital compliance are covenant management, portfolio monitoring, and capital provider reporting.
After companies raise debt, they're often surprised by the volume of financial and asset-level reports they have to provide to their capital provider in order to maintain full access to their capital. Part of this is a matter of process—it tends to be lawyers that negotiate these documents—and part of this is a matter of experience. Companies that haven't raised or managed debt before often struggle to make the most of their debt raise, especially if they lack in-house capital markets expertise.
The right technology can help your company ensure debt capital compliance by keeping you up to date on upcoming deadlines, automatically generating the financial and portfolio KPIs that your capital provider expects to see, and alerting you when you're in danger of tripping a covenant or other credit agreement stipulation.
For more, check out our previous article on debt capital compliance.
The takeaway: The journey isn't over after you've raised debt capital—you'll need to make sure you have the right people, processes, and tools in place to follow all the rules of the credit agreement you've agreed to.
Want to learn more?
Capital strategy can make or break fintechs. If you're interested in learning more about software that can help you streamline your debt capital raise and management, just schedule a demo or take a self-guided product tour of Finley. We'd love to chat!
