Getting the Right Deal, Don't Trip Up On Covenants


When it comes to securing funding for your high-growth scale-up, understanding the implications of covenants is of paramount importance. Especially if you have plans to raise more money from venture capitalists (VCs), navigating the complexities of covenants becomes crucial.

The Implications of Covenants for Future Funding Rounds

To grasp the significance of covenants in funding rounds, it's essential to understand what they are and why they matter.





Covenants are financial and operational conditions that borrowers must adhere to when receiving funding, whether through debt or equity.



They serve as safeguards for lenders or investors, protecting their interests and mitigating potential risks.


One specific type of covenant that we will focus on today is the EBITDA positive covenant. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization—a widespread measure of a company's operational performance. A positive covenant relating to EBITDA requires a company to maintain a certain level of profitability and cash flow. It acts as an indicator of financial health and stability, providing assurance to lenders or investors.


Tripping covenants can have severe consequences for your future funding rounds. Imagine securing a debt deal with EBIDTA-positive covenants but suddenly experiencing cash burn as soon as you inject VC money into your business.


This unexpected turn of events can jeopardize the very covenants that ensured your initial funding. Tripping covenants may result in financial penalties, additional restrictions, or even trigger a default, which can have far-reaching consequences for your business's future.

The Long-Term Significance of Debt Deals & Cash Burn


In the realm of funding, debt deals play a pivotal role in supporting business growth. By securing a debt deal with EBIDTA positive covenants, you demonstrate your commitment to maintaining a healthy financial position. They act as a safeguard, ensuring that you continue to generate profits and meet your financial obligations.


However, things can change once you secure funding from venture capitalists or a debt deal where burn is less of an issue. Often, the focus shifts from immediate profitability to scaling the business rapidly. This usually leads to increased spending and burning through cash reserves.


While this approach may seem logical to fuel growth, it can be detrimental if not adequately planned and managed to avoid tripping your covenants.


The consequences of tripping covenants due to cash burn can be significant. Not only can it damage your relationship with existing lenders or investors, but it can also create a negative perception among potential future investors. Tripping them may erode trust and confidence in your ability to manage your finances effectively, making it harder to secure funding in subsequent rounds.

The Role of Fuse Capital in Planning Fundraising

At Fuse Capital, we understand the challenges and complexities involved in navigating covenants during fundraising. Our expertise lies in helping businesses plan out their present and future fundraising strategies to minimise the risks associated with taking debts.


Our team of professionals will assist you in developing a comprehensive fundraising plan tailored to your specific needs. We will work closely with you to understand your financial objectives, growth projections, and funding requirements.


With this information, we can create a strategic roadmap that aligns your fundraising efforts with covenant compliance.


In addition to strategic planning, we provide a financial model that simulates your earnings and revenues. This model takes into account various parameters, including covenants, cash burn rates, and VC funding. By incorporating these variables, we can help you identify potential pitfalls and make informed decisions to mitigate risks.


Our financial model acts as a valuable tool to assess the financial implications of different scenarios. It enables you to evaluate the impact of cash burn on covenant compliance, allowing you to adjust your strategy accordingly.


This proactive approach helps you stay ahead of potential term violations and maintain a strong financial position throughout your fundraising journey.

Leveraging Knowledge of Debt Funds and Cov-Lite Deals


Understanding the landscape of debt funds and their preferences is crucial for successful fundraising. At Fuse Capital, we possess in-depth knowledge of various debt funds and their specific areas of interest. This expertise allows us to connect you with the right debt funds that align with your industry vertical and funding requirements.


Moreover, we are well-versed in cov-lite deals, which have gained popularity in recent years. Cov-lite deals are debt agreements with fewer and less restrictive terms compared to traditional deals. While they offer more flexibility for borrowers, they also require a thorough understanding of the risks and implications.


Our extensive network and insights enable us to identify the debt funds that embrace cov-lite deals. By leveraging this knowledge, we can help you explore funding options that align with your business objectives while minimising the constraints imposed by covenants.


Understanding the implications of covenants for your future funding rounds is paramount to ensuring the long-term success of your business. By understanding the role of covenants, particularly EBITDA-positive ones, you can navigate the fundraising landscape with greater confidence.


Fuse Capital is dedicated to supporting businesses in their fundraising endeavours. We offer comprehensive planning, financial modelling, and insights into debt funds and cov-lite deals. By partnering with us, you can strategically navigate covenants, optimize your fundraising efforts, and position your business for sustained growth and success in the competitive world of venture capital.