Joyce M. Bernasek
June 27, 2023
Despite the current economic uncertainty and slower activity in the lending market, tech companies are standing out with a strong deal volume. With financing still flowing, many are taking advantage of the current lending climate to boost growth or get ahead of their competitors.
In the video below, Osler partner Joyce Bernasek outlines key requirements and issues facing tech companies looking to obtain debt financing in the Canadian market.
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JOYCE: Hello, I am Joyce Bernasek, a partner in the Financial Services practice at Osler.
It is certainly an interesting time in the lending market - the current economic uncertainty coupled with other factors has resulted in generally slower activity.
However, tech companies are once again standing out as an area in the lending market with a strong deal volume. Contrary to what some may think, financing is still flowing to tech companies – and many are taking the step to take advantage of the current lending climate to boost growth or get ahead of their competitors.
In this video I am going to provide an overview of the issues facing tech companies looking to obtain debt financing in the Canadian market.
Debt facilities are often viewed as a stage of maturity for start-up companies and represent a big shift from equity financing.
Here is what you can expect to be asked for in terms of requirements if you’re a tech company looking to obtain financing from banks right now:
- Depending on the business of the company, different types are available:
- Monthly recurring revenue, which is the most common with SaaS companies that have some type of subscription model or recurring revenue stream and the loan is based on the monthly revenue. Generally, lenders will provide 3-5 times the monthly recurring revenue.
- Revolver and term facilities are traditional facilities which also available and may also be on a demand basis, meaning that the bank can demand repayment at any time.
- Another thing to expect is more covenants – particularly since the SVB collapse, many banks will be including liquidity and other financial covenants to ensure there is cash on hand and to monitor the cash burn.
- Regular financial reporting will be required – preferably audited annual financial statements could be delivered but the bank may accept notice to reader financial statements in some cases.
- Lastly, the terms are generally tighter for the debt facilities that are being entered into now – banks are less willing or able to negotiate baskets for amounts of permitted debt or permitted investments. They are also seeking to take as much security as possible from subsidiaries, even if they are located outside of Canada.
If you foresee that you will have debt needs over the next six months, and are seeking a bank facility, here is what need to have prepared:
- have your financial statements and projections in order.
- Second, act with urgency before debt becomes more costly – the increases in interest rates have largely abated but the rates are unlikely to go down anytime soon.
If you want to find out more about this or other issues around financing for tech companies, please contact me and the Financial Services group at Osler.