A funding application to a debt funder will typically pass through one or more credit committee meetings before lending is approved.
A credit committee is made up of senior decision-makers within a lending institution who have the authority to approve facilities that cannot be sanctioned by the initial point of contact, such as a Business Development Manager.
The committee’s role is to assess whether the proposed lending fits the lender’s credit policy, regulatory requirements and overall risk appetite.
Depending on the transaction, the committee may consider factors such as:
- The financial strength of the borrower
- Historic repayment performance
- Existing debt obligations
- Current and forecast liquidity
- The level of security available
- The structure of the proposed transaction
- Risks associated with the target business
- The measures in place to mitigate those risks
For a business acquisition, the lender will also want to understand how the proposed debt will be serviced following completion and what would happen if trading performance deteriorated.
What information will the credit committee require?
For any funding proposal, and particularly where finance is being sought to support the purchase of a business, you should expect to provide a substantial amount of information.
This may include:
- An overview of the business and its history, often contained within the Information Memorandum (IM)
- Your plans for the future development of the business, including potential new markets, products or international expansion
- Sales and marketing plans, including the level of historic and planned investment in this area
- Cash-flow forecasts and profit projections
- Your personal CV and the CVs of other key members of the management team
- A SWOT analysis covering the strengths, weaknesses, opportunities and threats facing the business
- Historic financial information, typically including the previous three to four years of final accounts
- Evidence of the personal funds you intend to invest into the transaction
Collectively, this information forms an important part of your funding pack.
The objective should be to provide the lender with enough information to understand the business, the transaction, your plans following completion and, importantly, the risks associated with providing the finance.
A well-prepared funding pack can also help reduce unnecessary questions and delays later in the process.
How long does the credit committee process take?
The timescale can vary considerably from one transaction to another.
An initial credit committee assessment may take place within a few weeks of a formal funding application being submitted. However, second or subsequent committee approvals can take longer, particularly where additional information is required or the structure of the transaction continues to change.
In many cases, the overall timetable is influenced as much by the progress of the acquisition itself as it is by the lender.
Due diligence, legal negotiations, revised financial information and changes to the proposed deal structure can all result in the funding proposal being reconsidered before final approval is given.
This is why buyers should generally engage with potential funders as early as possible and maintain regular communication throughout the acquisition process.
Can a funder change its original funding offer?
Yes.
An initial funding offer or term sheet should not necessarily be viewed as the final position until the transaction has completed.
If the economic environment changes, interest rates move or new information emerges about the target business, a lender may revisit the terms originally proposed.
Changes could potentially affect:
- The amount the lender is prepared to provide
- Interest rates
- Whether the rate is fixed or floating
- Repayment terms
- Security requirements
- Financial covenants
- Conditions that must be satisfied before completion
The lender may also reassess the transaction if the financial performance of the target business changes materially during the acquisition process.
Ultimately, a funder is focused on one fundamental question: how will the loan be repaid if circumstances do not develop as expected?
A strong funding proposal should therefore demonstrate not only why the acquisition is attractive, but also how the business would continue to service its debt if trading conditions became more challenging.
How Valius can help
Whether you are considering buying, selling or planning the next stage of your business journey, having experienced support around you can make the process clearer and more manageable.
Valius works with business owners and management teams to understand their objectives, assess their options and navigate important strategic and financial decisions. If you would like to discuss your plans and explore the support available, register with Valius for an initial conversation.
