Debt pricing is related to the risk profile of the business which is largely driven by financial performance and account conduct.
Financial performance focuses on the P&L and balance sheet net tangible asset position; as such IP and goodwill are not used in this calculation.
It is recognised that the risk profile for Tech companies is not necessarily in line with the tangible asset base of the business so the standard methodology can be adjusted.
For existing clients, account conduct is a more important factor used in determining the level of risk associated with the business. By account conduct, I mean the day to day running of the account –
in that it doesn’t go into excess (unauthorised overdraft),
minimal unpaid items (Direct Debit/ Cheques)
working capital facilities fluctuate into credit and
debt is repaid in line with agreed amortisation profile.
It is worth noting that tangible security will also reduce the risk profile of the business and as such have a positive impact on pricing.
Similarly a monitored debenture over the debtors in the business (i.e. overdraft covered by 2.5x debtor cover) will improve the risk profile of the business and reduce pricing.