Debt Primer with Chase and Tyler from RBCx
Hi friends! Welcome to the blog recap of our Entrepreneur Education Series. Today, we’re sitting down with Chase Christensen and Tyler Kirk from RBCx to talk all about debt options, credit scores, and more.
Let’s do some quick introductions.
Tyler is the Director, Credit Advisory, and is the problem-solving, outcome-focused partner at RBCx. He is responsible for structuring and monitoring all platform financing relationships, interacting with internal and external partners to provide financing solutions that meet clients’ individual business growth needs.
Chase is the Vice President, Relationship Management, and is the one with the boots on the ground in Edmonton. Chase works with a ton of amazing Edmonton technology companies, helping and supporting them through their growth.
Let’s get to it!
We kicked off our session talking about the pros of debt financing, and factors that founders should keep in mind.
So what are the main benefits of debt financing?
It’s less dilutive and generally a lower cost of capital than equity capital.
It provides more operational flexibility, with favourable terms.
It allows you to leverage someone else’s capital to grow your business.
The financing and outstanding debt drives alignment with your bank. You can create a partnership with your bank, instead of just a transactional relationship.
Creating a partnership with the bank will allow you to access their network. For example, RBC is the largest bank across Canada, and RBCx has 100 individuals from coast-to-coast who work with innovative tech companies, companies that could align with yours. RBC also has great relationships with other vendors and can introduce you to the people you need to know, like accountants, lawyers, etc.
Big things to keep in mind?
Well, debt is a legal obligation that has to be repaid. Banks do usually take first lien on all assets.
Most debt will carry covenants - you’re now managing your business to the Bank’s expectations, not just your own.
Most banks will have asymmetrical leverage in a downside. When things aren’t going quite to plan, it allows you, as a founder, to think about if you want to take on certain terms from an investor, that may not always be in your favour.
There will be cost and reporting requirements that accompany the debt.
It can result in a financial partnership beyond just debt - like we mentioned above, there’s other products, services, and platforms that your financial partner has that can be very valuable to scaling your business.
Before we go too much further, we want to break down a few key terms.
A warrant - Banks will ask for a warrant which allows the bank to buy shares, at a predetermined price today for a future exit. This warrant incentivizes the bank to be a good partner, and work with the company through the rough times, as opposed to a traditional bank loan relationship, if things aren’t going well, the bank can force the company to liquidate to repay the loan.
Warrants are essentially for banks to mitigate their equity risk that they’re taking on.
A covenant - In a loan agreement, there will be covenants that say as a borrower, you have to perform to a certain level, have a certain amount of liquidity, etc. It essentially dictates what a borrower has to do, while it has the debt from the bank.
If the borrower breaks one of the covenants, the bank can force the loan agreement, which can mean paying back the debt, etc.
It can create friction between the bank and the borrower, as it can force you to manage your business to the bank covenant, vs how you want to actually run it.
Alright, let’s talk about venture debt! What is it?
Venture debt is term loan financing for venture-backed companies. It typically is only available to companies that have raised institutional venture capital money.
It generally comes into play when the company is at their Series A raise.
It can make equity less dilutive, as it will allow you more room to operate, before you have to raise more capital.
A big point is that there are NO financial covenants with venture debt, which provides maximum flexibility for the company.
Options are:
Operating Lines, which are short-term (2-3 year commitments) flexible loans that a business can use as needed, to borrow up to a predetermined amount.
They’re used to augment the capital raise to extend the runway, by say 3-6 months, to provide more flexibility and leverage.
It provides operational leverage, in good times and bad, so that you’re able to hit the milestones you need to, as a company.
For example, the bank will look at your MRR, multiply it by 6 months, and then give you the cash to cover the gap between purchasing from a supplier and fulfilling the contract.
Recurring Revenue Operating Lines - these lines are used to help companies manage short-term fluctuations in the company’s cash flow, smooth seasonal cash flow driven by contract booking and renewal cycles, or to bridge less than 12 months operating cash burn prior to an equity financing or exit event.
Scientific Research and Experimental Design Lending - is non-dilutive capital to unlock accrued ITC assets. Essentially, if a company has SRED credits that will be coming to them, from the provincial or federal government, the bank will fill that working capital gap.
This can be a powerful tool for early-stage companies to extend their runway, without having to raise equity or put in personal cash.
SRED lending does tend to be more project-based.
So what are the considerations entrepreneurs and founders need to make when choosing a financial partner?
Reputation in the market is huge. Think about how your bank and your relationship contact is viewed by others in the startup community/ecosystem and your network.
Also think about the products and services that the bank is offering. Is it tailored specific to the needs of your business? Or are they mass-market products with a one-size-fits-all approach?
Is this financial partner a specialist or generalist? How well do they know your industry? Have they worked with businesses that are similar to yours? How well do they know your business?
Ask for references! You can talk to other founders and entrepreneurs and find out how the bank/your contact will act when things aren’t going to plan.
And what type of companies does RBCx typically work with?
Our goal at RBCx is to work with companies that have disruptive models, that have intellectual property that’s going to shake up the industry.
For us, it’s harder to lend money to companies that are super early-stage, because we don’t have a history to look at. We’re not able to look at the company’s revenue, liquidity, cash flow, runway or investor support, which are typically the gateways that we need to look at and analyze. We typically do the same due diligence that a VC firm will do, if they’re planning to invest in you in a Series A, B, C, round.
What are the timelines that you’re looking at, to secure debt financing?
It’s actually pretty quick for us at RBCx. We will do our due diligence and approvals within 2-3 weeks, and then once that’s agreed on by the company as well, we’ll start the loan documentation, which will take approximately 6-8 weeks.
We always expect companies to shop around and compare which financial partner will be the best fit, the best price, etc., as well as securing their own legal representation, and those are the 2 items that can sometimes affect the timelines I mentioned above.
Do you have any recommendations for companies that are too early-stage for RBCx?
There are a lot of great options in the market, and we’re also happy to make
introductions to other institutions or companies that you may want to work with.
We’re focused on making sure that innovation succeeds in Canada. We want to work with, support and grow these companies. We’re in it for the long run, a true partnership. That’s our goal at RBCx.
Interested in finding out more about venture debt and what RBCx can do for you? Connect with Chase Christensen and Tyler Kirk on LinkedIn!