New borrowers need to be aware of the dynamics underlying debt capital pricing, and how to align their own expectations with the realities of the credit market. By Aishwarya Dahanukar, co-founder and chief commercial officer at Tangible.
The world of debt is often a new landscape for a hardware startup founder compared to the world of venture equity funding. Sometimes, they enter this process with the wrong (peer) companies as benchmarks in mind. While it is good to be ambitious, they approach this process with unrealistic expectations around the commercial terms available. The problem is one of awareness and understanding.
The fact is that younger companies are more expensive to lend to because they are newer and higher risk. Until the lender feels comfortable that a founder knows what they are doing, they will not offer funding on the same attractive rates that others may have secured. Here, some startups fail to understand the nuances of what lenders need to see.
Read more: A wise capital stack
Natural motivations
Interestingly, neither the founder nor the lender is acting irrationally. At Tangible, we work with both sides of the table and appreciate the unique motivations behind borrowers and lenders alike. It is intuitive to say, ‘I want to pay less for something’ and therefore, founders are behaving very naturally. At the same time, lenders want to be assured they are funding a business that will pay them back.
The bar for the latter has become higher with recent high-profile insolvencies shining a light on the importance of credit due diligence and know-your-customer (KYC) processes. These cases highlight the risk of real loss and – in a market sometimes prone to having a short-term memory – this has sharpened lenders’ focus on underwriting standards and data verification. Tangible’s AI-enabled platform is a great tool here.
Read more: Funding the new frontier
Meeting in the middle
We understand what both parties are looking for. For hardware founders, this comes down to performance history, track record, demonstrating a genuine product market fit and customer retention. Meanwhile, lenders want to feel fully comfortable about who they are working with, and that they can satisfy all the necessary KYC steps to not only begin a working relationship but then also allow this to expand.
Tangible acts as the translation layer to make sure both sides understand that the other is not acting irrationally, and to help find that alignment point where a transaction can be done. For a later stage hardware company, the alignment may come quicker because the borrower is more established and there is less time spent proving the basics. Meanwhile, more work is required with earlier stage companies. Some of these hardware asset classes are also fairly new to asset-backed structures and need a bit more work with lenders in general.
Like any deal, a mutual understanding is required. This can require a lot of work, especially when the borrower and lender both enter a terrain that is somewhat new to each side. Connecting the two, and developing that mutual understanding, is why Tangible’s role is vital.
This is promoted content published in partnership with Tangible.
