Setting yourself up for success with your first credit facility

Credit facilities give you access to capital without the same dilution of equity and are often used to help solve material gaps in cashflow timing or needs tied to critical business processes. But the level of scrutiny that comes from lenders means getting ahead of the diligence process is crucial. While it might be intimidating, if you understand how lenders think you’ll have a strong chance of securing this valuable type of financing and accelerating your business’s growth.

Zeev Krieger is the CEO of Turtle Hill Capital. We sat down with him to discuss when you should and should not seek out a credit facility, finding the right lender, and convincing them you have a creditworthy business.

How a credit facility differs from a loan

Credit facilities are a form of financing designed to support a specific business purpose, such as financing customer leases, developing a project, or acquiring equipment. Because each draw of the facility is tied to that purpose, you often won’t get all the cash at once (like a term loan) but will receive it based on specific conditions, usually tied to a level of assets and / or milestones such as receiving a heat pump rebate confirmation or completing an EV charger install. A credit facility can be more extensible but also has more complex compliance and reporting requirements than a term loan. 

The restriction of funds being tied to new asset growth or business processes often means that you have less cash drag – you’re not paying for capital you’re not using. More importantly, because the lender’s analysis is focused on your use of proceeds, your assets, and your customers, the spotlight isn’t entirely on you. For an early-stage company, this can be a blessing. However, just because the credit worthiness of a receivable is tied to your customer, doesn’t mean you - the borrower - are not being held accountable in your interactions with the lender.

When it makes sense to seek out a credit facility

1. You have predictable payments coming in
You know when and how you’ll get paid for delivering goods and services to a contracted party. Ideally the process of validating payments is clear and replicable.

2. You’re supporting your customers’ working capital 
In this case, you’re more of a facilitator than a borrower – but nonetheless, the lender will look to you as the source of 1) quality information and 2) accountability for the facility.

When to avoid taking on a credit facility

You have access to concessionary capital
This applies, for instance, when one of your investors is mission driven or impact-first and they’re happy to give you a sub-market-rate loan. It doesn’t mean you should raise more equity, as it’ll be very expensive and dilutive. 

However, be aware that while concessionary capital might be cheaper than commercial capital, it won’t help you build a loan history the same way. You’ll risk being denied larger loans when you need them because you won’t be able to show you can service commercial debt with commercial reporting and performance obligations.

It’s also worth noting that concessionary capital can often be complementary to commercial capital. Many sources of concessionary dollars in fact have a “multiplier effect” target where they expect their money to help bring in larger pools of commercial capital at scale. 

Blending concessionary and non-concessionary capital together can be valuable especially if the underwriting from one helps to validate or support the economics of the other.

Identifying the right lenders

1. Tap your network 
Starting with warm leads will help you have lower-stakes conversations and receive candid feedback. Don’t start out with a major institutional lender unless you have a close relationship or your ducks in a row. It is hard to overstate how valuable it is to work through the kinks and practice telling your story to a lender to ask more sensitive questions you might not be ready for day one. First impressions matter a lot especially around matters like organization and preparation. 

2. Look for someone who’s been there 
Lenders tend to specialize in certain deal types, asset types or company types , and even if they say they cover a wide range, they will always have a comfort zone. Make sure they’ve done your specific type of deal before or at least something similar and can demonstrate an authentic interest to work with you to figure it out. 

3. Look for signs of active engagement
Some lenders have a tendency to throw out term sheets to test the waters or build up optionality in their pipeline. The most important signifier of whether a facility can get done is whether the lender seems engaged - does this deal fit the thing the lender seems like they are built and excited to do. Be prepared: credit facility discussions can sit in limbo for a long time, so don’t mistake length of time as the ultimate marker of whether or not a deal can happen. Deals ultimately get closed when the conditions on the borrower side meet the lender’s ability to actively focus and drive the deal to get done. 

Lenders who are engaged ask a LOT of detailed and pointed questions. Don’t get exasperated if it feels like they are trying to understand your business and process in excruciating detail. It’s a sign of respect that they want to understand your business well enough to give you a significant amount of money and trust you will pay it back. 

4. Size your facility properly
The lending world generally falls into three camps when it comes to sizing. 

First, smaller lenders who often operate locally, with a specific geographic or borrower profile and constrained amounts of capital – think local community banks or green banks. Typically, at most they’ll lend up to $5m. This could be a great match to get the flywheel going to demonstrate credit worthiness but probably won’t scale.

Next, are lenders who will try to stretch across sizing. They might come in with smaller facilities at the start, several million is usually a baseline,but their goal will be to get you to $20m, $30m, or even $50m. Crossing certain size thresholds ($20 or $25mm) will unlock interest from a much broader array of capital so there is value in a facility that can allow you to flex up to that threshold to prove institutional readiness.

Then there’s lenders who have pretty high minimum thresholds, e.g. $20m or even higher. They may not be able to finance the first facility, but it could be worth starting the conversation now. There is nothing a lender likes to see more than a company who sets targets, says they are going to complete an action, and then executes on it. You can think about this as a “shadow loan-tape” if a lender can mark your progress from the side as though they would have been invested that can really help get something done in future.

Regardless, don’t be seduced by the size of a facility. If you go through the expensive legal headache of getting it set up, but don’t get the deployment volume, the lender will lose interest and likely shut it down. 

This is a critical point, if the lender looks at you as a free option for a huge loan in the event you scale heroically that carries risk. You want a lender who is authentically engaged with your company based on your current scale and your near term growth potential, based on realistic assumptions. 

5. Understand cost implications
It's important to have a very clear-eyed understanding of what lenders are offering. Don’t get stuck negotiating theoretical interest rates. Figure out the cost implications of what you are paying in dollars and cents. If the difference between 12% and 13% is $10k a month, what does that mean for your headcount or runway? Also consider how much time you have to bear that cost. Does one facility lock you into a rate and structure for a very long time or is it designed to help you bridge to the next facility?

Plus, don’t forget the difference between the explicit cost (interest rate, fees) and the implicit. One term sheet might be cheaper but require much more work to report to the lender. Or, you might spend $50,000 and six months negotiating a 1% interest rate without factoring in the opportunity cost of not having that capital in the meantime. There’s also the issue of prepayment: if the prepayment penalty is modest, it can be worth getting started, and you’ll have an easier job convincing your next lender if you can show you’re outgrowing the current one. 

It is critical to understand that the number one thing that drives down cost of capital is performance. Your first credit facility is almost certainly not going to be your last. Focus on a facility that is at a scale and level of complexity you can manage well and if you are successful you will either a) unlock cheaper capital from your same lender or b) you will be able to graduate to a larger / more cost effective facility. 

6. Running a competitive process
Apart from demonstrated performance the other thing which will most drive down cost of capital and MAY  help with lender engagement is having a competitive process.

This one is a bit of an art. It is absolutely critical for you to have multiple conversations to see what is out there, what pricing / structure is possible, and how different lenders look at a deal. 

The fact you are talking with multiple lenders is usually a good fact pattern and having other termsheets is usually more validating than not. Other lenders like to know they are talking with a business other lenders think is viable. This will also allow you to negotiate more credibly from a place of choice. However, most lenders do not want to engage in an overly competitive process. If they feel you are shopping terms or trying to play them off each other too much, many will walk away.

Try to focus on what makes a given lender attractive to you, what you authentically want from them and why and treat them with respect. If two lenders offer different benefits (e.g. terms or rates), it is okay to lay out what your criteria are and explain how you’re making your decision. Treat the negotiation as a relationship building process. How you handle transparency, communication, and difficult conversations will affect the likelihood of getting something done. If you negotiate in a way that undermines trust, the lender will assume that same behavior once you become a borrower. 

7. Don’t overlook the relationship 
Loan agreements are often complicated. Asset Based credit facilities often have more covenants because they are tied to specific assets and performance. Long, complex lending docs are not designed to be punitive but they ARE designed to give the lender flexibility if things are going sideways and the borrower is not meeting their obligations. 

This also means there are often multiple ways a lender can cut the  cord if they're unhappy. Look for a lender who takes the time to really understand your business, and will work through tough patches to come up with a good outcome.

This is why it is important to build trust with your lender during the negotiation process. If they trust you are being honest with them about your business, they are 1000x more likely to trust you to be a good problem solver. You might look past the trust factor if the money’s cheap enough, but if it feels intimidating or extractive, you should generally look elsewhere.

Engaging lenders, managing and accelerating diligence 

1. Build and run a structured process
The timeline for securing a credit facility is typically three to six months. So, once you’ve first talked to lenders, it’s important to have a plan and run a structured process. It is helpful to schedule them in the calendar and manage it like a campaign. Create space and prioritize key deliverables or else overall timelines will slip. 

2. Build your data room before the first conversation
Building out a data room with a lender can and should be a collaborative process with specific FAQs or customer diligence questions. However, don’t start with a blank slate and leave it to the lenders to ask you to add fundamental documents about your business – this can raise real red flags about your level of preparedness. 

You should start with a data room that shows you are thinking about your business from a lender's perspective and have anticipated some of the key gating questions in advance. You can learn about good data room practices here and here.

3. Think about risk from their perspective
The way a lender looks at your business is almost the inverse of the way your equity investors will. Lenders are far more focused on what can go wrong and how to deal with it than if everything is up and to the right. They care more about the receivables they’re lending against, your contracts, customers and business assets today and how they are likely to grow than your valuation in three years. As a secondary consideration they will also care about whether the loan can grow, so upside and deployment matter, but risk management is first and fundamental.

Lenders also want to know they have multiple pathways to recovery or getting paid back. This includes how much they are relying on you (the borrower) for a very specific action that only you know how to perform. So while you want to show your capabilities and unique strengths as a company you also want to counter their fears by highlighting the parts of your business, particularly those relating to performance by customers or operating assets that are highly standardized, repeatable and straightforward to execute, and/or can be supported by third-party partners. 

You will also need to show that you can realistically deploy the capital with a high quality pipeline. Most lenders will not be comfortable with anonymized pipelines or customers, so you’ll need to be prepared to share real, verifiable information and provide color on how opportunities graduate through the funnel.

4. Be willing to show historical financials
Few startups like to show historical financials to investors. But take it as a gut check that, if you are unwilling or hesitant to share and discuss your past financial performance in detail, you probably shouldn’t be raising a credit facility. Hiding your past performance and trying to showcase aggressive projections as a way to entice a lender will not work. You need to demonstrate real command over your company’s financials and what the levers are that drive your business topline, margin and cashflow timing. 

Having thin historical performance or low revenue does not mean you cannot get a credit facility done. A lender will look at everything from the perspective of performance and progress. If you can demonstrate that you understand your business well, can articulate a specific customer journey to cashflow, and that you maintain accurate financials, you can be successful even without a long history of performance. Even coming off a small baseline, lenders care a lot about trajectory and a real trendline they can extrapolate from. 

5. Get your books in order 
Never talk to a lender if your books are a quarter or two out of date.

In terms of your proforma, hockey stick projections will only set you back. Lenders will end up doing their own analysis and you’ll lose control of the narrative. Be upfront and honest about how much you actually expect to grow, not what you’re telling VCs. And with any piece of documentation, add a lever that shows high, mid, and low case scenarios (this is also called a sensitivity analysis). Assume a lender is going to take your projections and knock them back significantly. If you demonstrate to a lender you are using a more conservative case to help them support their underwriting, that’s generally a positive signal. Lenders like upside surprises way more than the other way around.

Startups’ business models can be complex, so lenders will appreciate it if you can boil it down to the essentials. The best way to do this is often a simplified unit-economic model tied directly to your contracts and use of proceeds. Put the part of your business they care about in the spotlight show exactly how can conversion happens and what payback timing is and avoid fantasy unit economics or inflated gross margins – just show that you have the cash flow to support a facility. 

6. Build your DDQ in advance
For an extra layer of preparation, ask other founders or folks in your network what Due Diligence questions they had to answer. You can also ask a lender to proactively share what their standard DDQ is (many will have one) as a way to prepare for subsequent conversations. You can even give an AI the fact patterns about your business and ask it to give you the top 20 questions a lender is likely to ask you and figure out your answers ahead of time. But the key is to give enough input about your business stage, nature of customers and unit economics that you can get questions specific to your business and circumstance. You can waste a huge amount of time chasing down AI outputs that are not relevant or well tailored.

7. Err on the side of humility
While VCs might love it when a founder has a big vision and wants to conquer the world, lenders will just see ego. Don’t send the wrong signals – be transparent and show humility, especially in negotiations.

Zeev Krieger is the CEO of Turtle Hill Capital. He brings 20 years of experience in alternative investments, building businesses and managing portfolios across structured credit, sustainable infrastructure, growth equity and impact strategies. Previously, Zeev launched Third Sphere’s inaugural private credit fund dedicated to supporting the next generation of climate technology companies. Before that, Zeev managed investments for the Smith Family Circle, transforming a passive family office into an active $200M+ media, entertainment and real estate holding company. Zeev’s earlier experience includes four years in Investment Management at Goldman Sachs, as well as impact-oriented founding leadership roles across real estate platforms and non-profits. Zeev holds an MBA from NYU Stern School of Business and a BA, cum laude, from the University of Pennsylvania.