Incentives shape behavior, especially on data-driven teams. For Finance and Capital Markets teams, aligning on the right KPIs with company leadership can streamline communication and clarify priorities before issues escalate.
Previously, we covered how to hire a Head of Capital Markets. Today, we'll address the topic of picking the right Capital Markets KPIs, focusing primarily on metrics for corporate borrowers or fintech startups that have asset-backed credit facilities.
What are Capital Markets KPIs?
Capital Markets KPIs, or key performance indicators, are quantifiable goals that help Finance and Capital Markets teams track and communicate their progress on their own team, and to stakeholders across the company.
We've typically seen Capital Markets KPIs fall into two major categories: capital access metrics, and team efficiency metrics. Both are important to measure and improve, but they serve different purposes.
💰 Capital access metrics relate to a company's ability to access debt capital. Examples include metrics such as a borrower's effective advance rate, for an asset-backed credit facility. These metrics tell you whether your company is accessing capital at a competitive rate.
⏱️ Efficiency metrics relate to a Capital Markets or Finance team's ability to streamline common debt capital operations, such as executing a draw request to access funds from a revolving credit facility. These metrics tell you how you might improve your internal processes around debt capital operations and management.
What are examples of effective Capital Markets KPIs?
Below, we list five examples of Capital Markets KPIs sourced from Finley customers:
💸 Effective advance rate. A borrower's effective advance rate is how much they're able to borrow (their max advance amount), as a percentage of the total value of their collateral. The stated advance rate (as defined in a credit agreement) and effective advance rate can differ when a borrower is borrowing against cash (this is usually inadvertent) or, as explained below, when a borrower pledges receivables that are ineligible or contain excess concentration. Tracking effective advance rate is a good way to ensure that a business isn't paying too much for its capital or pledging the wrong types of receivables.
🤔 Expected versus actual interest and fees, over time. Credit facility utilization is an underappreciated variable when it comes to calculating the "cost" of debt capital. Borrowers are not always aware that credit facilities can come with fees for using, or not using, a portion of a credit facility. For that reason, it's important to track the expected versus actual interest and fees, on a monthly basis. This insight can help Finance and Capital Markets leaders know what to negotiate for in future capital raises.
💸 Ineligible receivables and excess concentration over time. As we covered in a previous post on borrowing bases, borrowers with asset-backed credit facilities don't get to borrow against all of their receivables. Rather, capital providers deduct ineligible receivables and excess concentration (the sum of receivables that exceed a concentration limit) from the portfolio total before applying an advance rate. Minimizing ineligible receivables and excess concentration is one way to ensure that a business maximizes capital access and minimizes borrowing costs.
🤝 Average number of turns, per funding request or recyling request. Many first-time corporate borrowers expect that executing funding transactions will be straightforward. More experienced borrowers, however, understand that draw requests and other transactions might require significant back-and-forth between the lender and borrower. This is particularly common in deals with complicated credit agreements, incomplete or inconsistent loan tape data, or unstable collateral values.
🚨 Financial covenant and portfolio triggers breached. The worst-case scenario for a Finance or Capital Markets leader is entering an event of default and losing access to capital. Of course, by the time a borrower trips a covenant, it's already too late! We recommend setting up automatic alerting when financial metrics approach covenant thresholds or portfolio triggers. That way, you can take measures to ensure compliance. The KPI, in this instance, could be aiming to have fewer than 2-3 threshold breaches per year.
Why are Capital Markets KPIs hard to measure and improve?
Capital Markets KPIs tend to be difficult to nail down, regardless of how mature an organization is. The primary reason is that the responsibilities of a Head of Capital Markets can vary tremendously from week to week, or month to month.
Initially, a Head of Capital Markets might be brought on to a company to help raise debt capital. That process can take anywhere from a few months to a few quarters, depending on the company's negotiating power, financial track record, and capital provider. In that situation, should a Capital Markets leader be goaled on speed to deal execution, or on the quality of the deal they secure? Is it important for a Head of Capital Markets to get multiple term sheets? You can see how the hypotheticals quickly add up, and how the counterfactual might be hard to imagine.
After a debt raise, the role of a Capital Markets leader turns to operationalizing the credit agreement. What are the covenants and rules that the corporate borrower has to follow in order to secure access to their debt? Are there regular deliverables, such as weekly borrowing base reports or monthly financials, that the borrower must send to the capital provider? What is the standard operating procedure for executing a covenant waiver, should the borrower trip a covenant?
In equity or VC investments, the focus is on what could go right. In debt, effective capital management means focusing on and preventing what might go wrong! That carries a broad "surface area" of risk and responsibility.
The second reason that Capital Markets KPIs are hard to measure is that most Capital Markets operations have traditionally been done via email and Excel, which are error-prone and hard to audit. Unlike in equity, which has a fairly robust technology ecosystem, debt capital professionals have been underserved by technology and unable to prove their own effectiveness.
As we discuss below, having the right technology can provide much-needed visibility into the state of capital access and funding efficiency.
How can technology help improve Capital Markets KPI tracking and standardization?
You can't improve what you don't measure. At large public companies like Affirm, Capital Markets teams can have several dozen employees, and sophisticated tooling for measuring Capital Markets KPIs. At smaller companies, however, we've found that the key role technology can play, when it comes to Capital Markets metrics, is enabling leaders to look at capital availability and operational efficiency even early on in a company's debt capital journey. These baselines can serve as reference points for future improvement.
Technology can help in this regard by serving as a system of record for tracking borrowing base size and advance rate over time, compliance with covenants and deliverables, and efficiency metrics like the average processing time for a funding request. We recommend starting with 2-3 KPIs that have been agreed upon between Finance and executive leadership, and expanding the scope of KPIs gradually.
Want to learn more?
Finley is private credit management software that helps Finance and Capital Markets teams manage asset-backed loans. Our software accelerates funding transactions and minimizes risk by automating routine debt capital management tasks like borrowing base reporting, verification, and alerting.
Today, Finley manages over $3 billion in debt capital for customers like Ramp, Parafin, and Arc. If you want to learn more about software that can help you streamline your debt capital raise and management, schedule a demo or take a self-guided product tour. We'd love to chat!
