June 30, 2021
Insights

The Briefing: How Ramp raised $150M in debt financing from Goldman Sachs

,

Editor's note: We're excited to launch a new series today called The Briefing. Every month, we'll invite finance leaders to talk about strategic projects that have been pivotal to their business growth, and what their peers can learn from them. In this first briefing, Ramp's Head of Finance and Capital Markets Alex Song shares when and how finance leaders should consider debt financing. Follow us on LinkedIn or Twitter to get alerts about new briefings.

Earlier this year Ramp closed a $150 million debt financing facility from Goldman Sachs to accelerate our growth and enable us to serve even more customers. Ramp is already the fastest corporate card to hit $100 million in transaction volume by our customers and our first debt capital facility will ensure we can continue to support our customers. 


It’s not that typical for such a young company - the deal came a year after we launched our first card - to raise a large debt facility like this from a top tier institution like Goldman Sachs, so I thought it would be helpful to share how we approached it, as well as providing some guidance on how to approach debt financing for your own business. 

Deal summary
Ramp raised $150 million in asset-backed debt to fund our corporate card business.
Key learnings
The market for asset-backed debt financing is growing quickly, and large institutions are relatively accessible once you hit a certain scale.

Return on asset is the most important metric a lender will consider, because it signals if there is enough cash flow to service and ultimately repay the debt.

Put together a world-class data room and be prepared to invest a significant amount of time ensuring the accuracy and depth of your data.


Is debt financing right for you?

There are a few considerations when thinking about whether or not to raise debt for your business. One major constraint is the size of the loan or credit line you actually want, because that can be attractive to or deter institutional lenders. Most investors start becoming interested in deals once you start asking for $50 million or more, and once you go over $100 million, you can tap into most of the major investment banks. For anything less than $50 million or so, there is unfortunately not a deep or liquid market and fundraising can be a bit more ad hoc. 


Assuming you are playing in that ballpark, when and how does it make sense to raise debt rather than sell equity in your business? 


The decision depends on what the business wants to finance. If there are cash flowing assets on the balance sheet, then it is a lot easier to finance using asset backed debt. But if your company is a traditional start-up business burning cash, then it’s easier to finance using traditional venture debt (a topic we’ll revisit in a future article). In either case, debt is “cheaper” than equity because you don’t dilute your equity ownership in the business. However, one thing to consider is that many venture debt lenders will ask for warrants in your business, and that can be dilutive in the long run. 

"You can raise debt whenever you can legitimately claim a reasonable track record for the business model and the assets"

As for timing, the short answer is you can raise debt whenever you can legitimately claim a reasonable track record for the business model and the assets. In this instance, a track record means robust cohort data or repayment data. For a mortgage business, it might take many years to demonstrate a track record (the average mortgage takes 7-10 years to pay back!), but for a corporate charge card like Ramp’s, it could be a matter of only months, because the performance data accrues so quickly. 


For Ramp, it was an easy decision to use debt to fund our charge card receivables, but for a non-card issuing business, what kind of assets could be used to raise debt? Generally anything with economic value and which has the potential to generate cash flow. 


Examples may include:

  • Any source of receivables/AR, e.g. a SaaS company with predictable, annual contract revenues, or a consumer loan payment as part of a Buy Now Pay Later portfolio
  • Royalties that are rock solid/contractual. I’ve seen music, pharma, patents, etc. For example, a pharmaceutical company with a 20 year patent on a drug (or a portfolio of drugs) with reasonably predictable sales figures can finance that as an annuity. 
  • Equipment. Imagine a portfolio of assets or leases of those assets. Phones, printers, farming equipment, telecoms infra / towers, aircrafts, etc. Planes usually have 10-20 year leases attached to them from very reputable airlines, and are easily tradable and financeable assets because of that predictability. 
  • Other, more esoteric assets, such as tax credits, wireless spectrum, legal settlements, rough diamonds, ground leases, etc.


There’s one other small but notable advantage of debt financing: From a tax perspective, interest expense and debt service comes out of your taxable operating profits, so you are getting a modest tax shield, which is always a good thing if you are a profitable company and are paying taxes. 

The nuts and bolts of raising debt

Needless to say, the metrics and KPIs a lender will look for when assessing your credit worthiness can be very different to what equity investors consider. Equity investors are taking a bet on the growth and future value of the business so they pay attention to things like the size of the Total Addressable Market and traction with sales and marketing, etc. In contrast, debt investors are focused on capital preservation and yield, so their analysis generally will dig deep into the unit economics and cash flow profile of the business (even at the very earliest stages!). 

"'Return on asset' is probably the most important metric that a lender will consider"

They go through the entire value chain beginning to end and you need to explain how you originate the assets, how you service them, how you offboard customers. They will look closely at repayment behavior, timing, interruptions, delinquencies and cures. The lower the delinquencies, the better. We work with our friends at Finley to keep track of some of these KPIs for our portfolio of assets.


Ultimately, “return on asset” is probably the most important metric that a lender will consider. Put simply, is there enough cash flow to service and ultimately pay off the debt? Secondly, it’s critical for the company itself to be well capitalized with equity, just in case the assets underperforms expectations. Lenders want some capital cushion to support the debt and make sure they don’t get impaired if there is a hiccup in performance. As a rule of thumb, for every $10 of debt, you need $1-$4 of equity, depending on the asset being financed. 


Lastly, be mindful that raising debt (hopefully) shouldn’t impact your attractiveness to potential future equity investors. Some common pitfalls you should ensure to avoid:

  • If there is a huge amount of dilution involved, i.e. you give away warrants or equity, or if the lender has a significant liquidation or return preference
  • If there are negative covenants involved, i.e. you can’t raise more debt OR equity, without asking your lenders for permission
  • If there is funding risk, i.e. the lender can eliminate the funding at any point, you may want to think about committed vs uncommitted financing.

Generally speaking, having already raised debt is usually a plus for equity investors—it means you’ve got funds on hand to help the business scale, not to mention that debt investors have generally done deep diligence which is a positive signal. 

The Goldman deal 

Having surveyed the market last fall, we pretty quickly zeroed in on Goldman Sachs as the lender we wanted to work with, as it made sense from a number of strategic perspectives. Firstly they offered very competitive terms that were flexible—unsurprisingly given their track record working with early stage companies—and not that expensive from a debt servicing standpoint. Goldman Sachs also has a globally recognized presence and brand in the world of finance. That really helps to legitimize Ramp and give us a huge amount of credibility with customers, partners, vendors, investors and other stakeholders. 


This may seem a subtle distinction but Goldman Sachs also has the advantage of being a scalable partner. With their large multi-billion dollar balance sheet, they would have the capacity to facilitate a larger deal in the future if things go well for us, and we wanted to take on more debt to further grow Ramp’s business. This can be a real concern for some early stage companies whose financing needs grow more quickly than expected, and as such, they may have to “graduate” from their first lender and have to repeat the funding exercise from scratch all over again. That would clearly be another big time commitment, so it was definitely positive for myself and the Ramp leadership team to know that we are unlikely to have to reinvent the wheel over and over again with a capital partner like Goldman. 


Some of the other major players in debt financing for startups and early stage companies include Trinity Capital, Pacwest, Stifel, and WTI on the venture debt side. On the asset-based financing side, some lenders include Crayhill (one of my former employers), Atalaya, Ares, Angel Island, Owl Rock, Blackstone, Jefferies, Credit Suisse, and Waterfall. 

Exponential complexity 

The time involved in putting together an asset financing deal shouldn’t be underestimated—no matter which lender you work with, they’ll want to dot every i and cross every t. A deal of this size gets very intense and runs over several months, so prepare yourself for lots of late nights and weekends. 

"We cannot stress strongly enough on the importance of having zero error tolerance when building out the capital markets reporting function"

The diligence process alone ran over multiple weeks. Our capital markets and engineering teams spent many weeks and months putting together a world-class data room. As a modern fintech company, Ramp believes strongly in the accuracy and fidelity of our data, and therefore spent a significant amount of time sanitizing and cleaning our portfolio data to put our best foot forward to potential investors. Every single calculation and data field was checked and re-checked multiple times. We cannot stress strongly enough on the importance of having zero error tolerance when building out the capital markets reporting function.


To give some sense of the legal complexity of a deal like this, there were over 1,000 pages of documentation at the end of the day and anywhere between 3-10 drafts of each document. Using an equity fundraise as a comparison, the documentation there might typically be 10-50 pages.


While this may seem daunting, it really is essential to go through the credit agreement with a fine tooth comb, with your lawyers, and make sure you understand every line item and every definition. In my prior experience in working on private credit deals over the years, instances do come up where the folks who drafted the documents were not close to the deal terms and inadvertently introduced errors or slippage from what the borrower or lender intended. Don’t be surprised if you have to define or redefine certain KPIs or how certain portfolio triggers are calculated during the documentation phase, even if you already have a signed term sheet. Make sure you understand these mechanics and have a view on that. 


Having spent almost a decade as a fintech credit investor definitely helped me in this process because I knew most of the best practices and pitfalls associated with putting together a private debt financing. And don’t underestimate the value of picking a good law firm to work with—we enjoyed working with the folks at Paul Hastings


If you enjoyed this behind-the-scenes look at how we raised our debt financing, please share this article! In future pieces, we'll share insights on drafting your treasury policy, closing M&A transactions, and more.

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Alex Song
Head of Finance, Ramp

Alex brings over 10 years of experience as a hedge fund investor in structured credit, special situations, specialty finance, and fintech. He was born and raised in Changchun, China, and St. Louis, Missouri.

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The Briefing: How Ramp raised $150M in debt financing from Goldman Sachs

June 30, 2021
by
Alex Song
,
Head of Finance, Ramp

Editor's note: We're excited to launch a new series today called The Briefing. Every month, we'll invite finance leaders to talk about strategic projects that have been pivotal to their business growth, and what their peers can learn from them. In this first briefing, Ramp's Head of Finance and Capital Markets Alex Song shares when and how finance leaders should consider debt financing. Follow us on LinkedIn or Twitter to get alerts about new briefings.

Earlier this year Ramp closed a $150 million debt financing facility from Goldman Sachs to accelerate our growth and enable us to serve even more customers. Ramp is already the fastest corporate card to hit $100 million in transaction volume by our customers and our first debt capital facility will ensure we can continue to support our customers. 


It’s not that typical for such a young company - the deal came a year after we launched our first card - to raise a large debt facility like this from a top tier institution like Goldman Sachs, so I thought it would be helpful to share how we approached it, as well as providing some guidance on how to approach debt financing for your own business. 

Deal summary
Ramp raised $150 million in asset-backed debt to fund our corporate card business.
Key learnings
The market for asset-backed debt financing is growing quickly, and large institutions are relatively accessible once you hit a certain scale.

Return on asset is the most important metric a lender will consider, because it signals if there is enough cash flow to service and ultimately repay the debt.

Put together a world-class data room and be prepared to invest a significant amount of time ensuring the accuracy and depth of your data.


Is debt financing right for you?

There are a few considerations when thinking about whether or not to raise debt for your business. One major constraint is the size of the loan or credit line you actually want, because that can be attractive to or deter institutional lenders. Most investors start becoming interested in deals once you start asking for $50 million or more, and once you go over $100 million, you can tap into most of the major investment banks. For anything less than $50 million or so, there is unfortunately not a deep or liquid market and fundraising can be a bit more ad hoc. 


Assuming you are playing in that ballpark, when and how does it make sense to raise debt rather than sell equity in your business? 


The decision depends on what the business wants to finance. If there are cash flowing assets on the balance sheet, then it is a lot easier to finance using asset backed debt. But if your company is a traditional start-up business burning cash, then it’s easier to finance using traditional venture debt (a topic we’ll revisit in a future article). In either case, debt is “cheaper” than equity because you don’t dilute your equity ownership in the business. However, one thing to consider is that many venture debt lenders will ask for warrants in your business, and that can be dilutive in the long run. 

"You can raise debt whenever you can legitimately claim a reasonable track record for the business model and the assets"

As for timing, the short answer is you can raise debt whenever you can legitimately claim a reasonable track record for the business model and the assets. In this instance, a track record means robust cohort data or repayment data. For a mortgage business, it might take many years to demonstrate a track record (the average mortgage takes 7-10 years to pay back!), but for a corporate charge card like Ramp’s, it could be a matter of only months, because the performance data accrues so quickly. 


For Ramp, it was an easy decision to use debt to fund our charge card receivables, but for a non-card issuing business, what kind of assets could be used to raise debt? Generally anything with economic value and which has the potential to generate cash flow. 


Examples may include:

  • Any source of receivables/AR, e.g. a SaaS company with predictable, annual contract revenues, or a consumer loan payment as part of a Buy Now Pay Later portfolio
  • Royalties that are rock solid/contractual. I’ve seen music, pharma, patents, etc. For example, a pharmaceutical company with a 20 year patent on a drug (or a portfolio of drugs) with reasonably predictable sales figures can finance that as an annuity. 
  • Equipment. Imagine a portfolio of assets or leases of those assets. Phones, printers, farming equipment, telecoms infra / towers, aircrafts, etc. Planes usually have 10-20 year leases attached to them from very reputable airlines, and are easily tradable and financeable assets because of that predictability. 
  • Other, more esoteric assets, such as tax credits, wireless spectrum, legal settlements, rough diamonds, ground leases, etc.


There’s one other small but notable advantage of debt financing: From a tax perspective, interest expense and debt service comes out of your taxable operating profits, so you are getting a modest tax shield, which is always a good thing if you are a profitable company and are paying taxes. 

The nuts and bolts of raising debt

Needless to say, the metrics and KPIs a lender will look for when assessing your credit worthiness can be very different to what equity investors consider. Equity investors are taking a bet on the growth and future value of the business so they pay attention to things like the size of the Total Addressable Market and traction with sales and marketing, etc. In contrast, debt investors are focused on capital preservation and yield, so their analysis generally will dig deep into the unit economics and cash flow profile of the business (even at the very earliest stages!). 

"'Return on asset' is probably the most important metric that a lender will consider"

They go through the entire value chain beginning to end and you need to explain how you originate the assets, how you service them, how you offboard customers. They will look closely at repayment behavior, timing, interruptions, delinquencies and cures. The lower the delinquencies, the better. We work with our friends at Finley to keep track of some of these KPIs for our portfolio of assets.


Ultimately, “return on asset” is probably the most important metric that a lender will consider. Put simply, is there enough cash flow to service and ultimately pay off the debt? Secondly, it’s critical for the company itself to be well capitalized with equity, just in case the assets underperforms expectations. Lenders want some capital cushion to support the debt and make sure they don’t get impaired if there is a hiccup in performance. As a rule of thumb, for every $10 of debt, you need $1-$4 of equity, depending on the asset being financed. 


Lastly, be mindful that raising debt (hopefully) shouldn’t impact your attractiveness to potential future equity investors. Some common pitfalls you should ensure to avoid:

  • If there is a huge amount of dilution involved, i.e. you give away warrants or equity, or if the lender has a significant liquidation or return preference
  • If there are negative covenants involved, i.e. you can’t raise more debt OR equity, without asking your lenders for permission
  • If there is funding risk, i.e. the lender can eliminate the funding at any point, you may want to think about committed vs uncommitted financing.

Generally speaking, having already raised debt is usually a plus for equity investors—it means you’ve got funds on hand to help the business scale, not to mention that debt investors have generally done deep diligence which is a positive signal. 

The Goldman deal 

Having surveyed the market last fall, we pretty quickly zeroed in on Goldman Sachs as the lender we wanted to work with, as it made sense from a number of strategic perspectives. Firstly they offered very competitive terms that were flexible—unsurprisingly given their track record working with early stage companies—and not that expensive from a debt servicing standpoint. Goldman Sachs also has a globally recognized presence and brand in the world of finance. That really helps to legitimize Ramp and give us a huge amount of credibility with customers, partners, vendors, investors and other stakeholders. 


This may seem a subtle distinction but Goldman Sachs also has the advantage of being a scalable partner. With their large multi-billion dollar balance sheet, they would have the capacity to facilitate a larger deal in the future if things go well for us, and we wanted to take on more debt to further grow Ramp’s business. This can be a real concern for some early stage companies whose financing needs grow more quickly than expected, and as such, they may have to “graduate” from their first lender and have to repeat the funding exercise from scratch all over again. That would clearly be another big time commitment, so it was definitely positive for myself and the Ramp leadership team to know that we are unlikely to have to reinvent the wheel over and over again with a capital partner like Goldman. 


Some of the other major players in debt financing for startups and early stage companies include Trinity Capital, Pacwest, Stifel, and WTI on the venture debt side. On the asset-based financing side, some lenders include Crayhill (one of my former employers), Atalaya, Ares, Angel Island, Owl Rock, Blackstone, Jefferies, Credit Suisse, and Waterfall. 

Exponential complexity 

The time involved in putting together an asset financing deal shouldn’t be underestimated—no matter which lender you work with, they’ll want to dot every i and cross every t. A deal of this size gets very intense and runs over several months, so prepare yourself for lots of late nights and weekends. 

"We cannot stress strongly enough on the importance of having zero error tolerance when building out the capital markets reporting function"

The diligence process alone ran over multiple weeks. Our capital markets and engineering teams spent many weeks and months putting together a world-class data room. As a modern fintech company, Ramp believes strongly in the accuracy and fidelity of our data, and therefore spent a significant amount of time sanitizing and cleaning our portfolio data to put our best foot forward to potential investors. Every single calculation and data field was checked and re-checked multiple times. We cannot stress strongly enough on the importance of having zero error tolerance when building out the capital markets reporting function.


To give some sense of the legal complexity of a deal like this, there were over 1,000 pages of documentation at the end of the day and anywhere between 3-10 drafts of each document. Using an equity fundraise as a comparison, the documentation there might typically be 10-50 pages.


While this may seem daunting, it really is essential to go through the credit agreement with a fine tooth comb, with your lawyers, and make sure you understand every line item and every definition. In my prior experience in working on private credit deals over the years, instances do come up where the folks who drafted the documents were not close to the deal terms and inadvertently introduced errors or slippage from what the borrower or lender intended. Don’t be surprised if you have to define or redefine certain KPIs or how certain portfolio triggers are calculated during the documentation phase, even if you already have a signed term sheet. Make sure you understand these mechanics and have a view on that. 


Having spent almost a decade as a fintech credit investor definitely helped me in this process because I knew most of the best practices and pitfalls associated with putting together a private debt financing. And don’t underestimate the value of picking a good law firm to work with—we enjoyed working with the folks at Paul Hastings


If you enjoyed this behind-the-scenes look at how we raised our debt financing, please share this article! In future pieces, we'll share insights on drafting your treasury policy, closing M&A transactions, and more.

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