The Founder’s Guide to Raising Unitranche Debt in 2024

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Arc Team


Given its flexible nature and unique structure, unitranche debt is one of the more attractive funding options for startups interested in acquiring another business and for those looking for a more flexible alternative to traditional term loans. The hybrid loan structure combines senior and subordinated debt into one debt instrument and can be used to acquire financing from multiple parties, which helps speed up the funding process. In this guide, we break down all of the key factors to consider when pursuing unitranche debt financing. Let’s dive in!

Unitranch debt financing - the basics

What unitranche debt is (and isn't)

Unitranche debt is a unique form of financing that blends the characteristics of both senior and subordinated debt into a single loan facility. Unlike traditional loans, which typically only involve one lender, a unitranche debt facility can be funded by multiple lenders. Unitranche debt isn't a one-size-fits-all solution, it’s purpose-built for startups with specific use cases in mind.

How unitranche debt works

Unitranche debt simplifies the borrowing process for startups in a way that traditional financing structures often cannot match. It works similarly to how you put a puzzle together – you gather pieces from various lenders, each representing a different layer of debt with their terms, conditions, and interest rates. Then you start pairing lenders together, and with each piece, you get one step closer to the completed puzzle.

The result is a unique financial structure that otherwise wouldn’t have been possible. This streamlined approach not only eliminates the complexities associated with managing various lenders but also offers a more efficient and cost-effective alternative.

The key characteristics of unitranche debt

There are a few key characteristics that define Unitranche Debt and set it apart from traditional financing methods, we’ve outlined them below.

  • Single-Lender Structure: Unitranche debt streamlines the process by consolidating all debt layers from multiple lenders under one umbrella. This simplification contributes to a more efficient and cohesive borrowing experience for startups.
  • Blending Senior and Subordinated Debt: Unitranche Debt combines elements of both senior and subordinated debt within a single facility. Check out this guide for more information on senior vs subordinated debt.
  • Superior Flexibility: Unitranche financing offers a high degree of flexibility in structuring deals. Terms and conditions can be tailored to meet the specific needs of the borrowing company, allowing for customized solutions.
  • Simplified Repayment Structure: Unlike the complexity associated with managing multiple layers of debt with different repayment schedules, Unitranche Debt simplifies the repayment structure with a single repayment plan.
  • Speedy Transaction Process: Unitranche financing is known for its expedited transaction process over traditional debt.
  • Potential Cost Efficiency: Consolidating debt layers often leads to reduced transaction costs and lower overall borrowing expenses compared to navigating multiple lenders individually.

Common terms of a unitranche debt facility

  • Interest Rate: In Unitranche Debt, startups will encounter a single fixed interest rate, as opposed to separate rates for senior and subordinated debt. It is typically pegged at around Prime +2 to Prime +6%.
  • Amortization Structure: The repayment of the principal loan amount over the loan term. It may be structured as either an amortizing or bullet payment, however, bullet payments are the most common.
  • Covenants: These are the agreed-upon terms that borrowers must adhere to during the loan term. These could include financial ratios, operational benchmarks, or restrictions on certain activities. These are the covenants, clauses, and provisions to avoid.
  • Maturity Date: This is the date on which the loan is due to be fully repaid. It marks the end of the loan term. Typically it's 24-36 months in the future for a unitranche debt facility.
  • Supplemental Fees: Charges beyond interest that you may incur, such as arrangement fees, commitment fees, or prepayment fees.
  • Collateral: These are the assets you are pledging as security for the loan. In Unitranche Debt, collateral may provide security for both senior and subordinated portions.
  • Subordination Terms: This describes the relationship between the senior and subordinated portions of the debt, and specifies how repayments are allocated in the event of default or bankruptcy.
  • LIBOR Floor: This is the minimum interest rate you will be charged, it is tied to the London Interbank Offered Rate (LIBOR).
    Change of Control Provisions: This outlines how the loan may be affected in the event of a change in your startup's ownership or management.

Assessing Whether Unitranche Debt Is Right for Your Startup

Advantages of Unitranche Debt

  • Simplified Structure: Unitranche Debt consolidates different layers of debt into a single facility with one lender, which reduces the complexity of managing multiple lenders and debt layers, streamlining the borrowing process for startups.
  • Fast Funding: Unitranche financing typically offers startups quicker access to capital compared to traditional financing, enabling prompt execution of strategic initiatives or addressing immediate financial needs.
  • Flexible Deal Structures: Unitranche Debt provides a high degree of flexibility in structuring deals, enabling startups to tailor terms and conditions to their specific needs.
  • Cost Effective: Consolidating multiple debt layers into a single debt vehicle can lower transaction costs and the overall borrowing expenses for a startup.
  • Unified Repayment Structure: Unitranche Debt simplifies the repayment structure with a unified plan, which provides clarity in planning for principal repayments.
  • Mitigated Execution Risk: Unitranche financing reduces execution risk associated with coordinating multiple lenders.

Disadvantages of Unitranche Debt

  • Higher Cost of Capital: Unitranche financing may come with higher interest rates compared to senior debt alone.
  • Limited Renegotiation Options: Once the Unitranche deal is in place, there may be limited opportunities for renegotiating the terms.
  • Potentially Complex Legal Structure: Unitranche deals may involve complex legal structures, especially when combining senior and subordinated debt.
  • Risk of Overleveraging: The flexibility of Unitranche financing may lead to overleveraging if a startup does not manage its debt carefully and borrows beyond its capacity to service the debt.

Requirements to Qualify for Unitranche Debt

Unitranche debt may be a versatile financing option, but not every startup is eligible to leverage its benefits. In the section below, we cover the key factors that lenders typically assess when evaluating a startup’s fit for unitranche debt.

  • Financial Health: Lenders assess the financial health of a startup, including revenue, revenue growth, benchmark cash flows, unit economics, runway, and more to determine whether or not it will be able to meet the debt obligations.
  • Creditworthiness: Unlike consumer debt, early-stage startups typically do not have a credit score or history of positive credit. As such, lenders look at other factors to determine the overall creditworthiness of a startup. 
  • Operational Stability: Unitranche debt lenders evaluate the stability and sustainability of the startup's operations.
  • Use of Funds: Lenders may inquire about the specific purpose for which the startup intends to use the borrowed funds, which helps lenders understand the strategic objectives of the startup and assess the risk associated with the investment.
  • Collateral: The availability and quality of the collateral offered by the startup may impact eligibility, thus lenders evaluate the assets of the startup.
  • Debt-Service Capacity: Lenders evaluate the startup's capacity to service the debt, which helps clarify the startup's ability to make timely principal and interest payments.

Tips for a successful unitranche debt raise

Successfully accessing unitranche debt requires a strategic approach and careful consideration. Here are a few tips to guide you through your journey of securing financing:

  • Forecast & Plan Ahead: before approaching any lenders, make sure that you have a clear understanding of how much capital you need and what you intend to use the capital for.
  • Identify Lending Partners: there are hundreds of players in the credit universe, but not all of them are the right fit for your objectives. Start with a list of ~20 names and narrow it down to your top choices, then ask for warm intros from your investors and your network. 
  • Secure Two-Term Sheets: the most important factor in a successful unitranche debt raise is getting at least two term sheets. With two term sheets, you have leverage, which is useful when negotiating better terms for your startup. 
  • Heatmap Key Terms: While the headline cost of capital is something that should be considered, it's also important to consider the covenants, the amortization structure, and the maturity date of the facility. 
  • Maintain Open Lines of Communication: Open communication builds trust, helps prevent misunderstandings, and conveys your expectations throughout the process.
  • Seek Professional Advice: If you do not understand a term or particular requirement of the deal, it is vitally important that you seek outside counsel.

Frequently asked questions about unitranche debt

How Does Unitranche Debt Differ from Traditional Financing?

Unitranche Debt consolidates different layers of debt into one facility, providing simplicity and efficiency compared to traditional financing involving multiple lenders and debt tranches.

How Is the Interest Rate Determined in Unitranche Debt?

The interest rate is typically influenced by market conditions, risk factors, and the overall financial health of the startup. In 2024, we’re seeing Prime +2% to Prime + 6%.

What Criteria Do Lenders Use to Evaluate Eligibility for Unitranche Debt?

Lenders may consider financial health, creditworthiness, operational stability, industry outlook, use of funds, collateral availability, management team, debt-service capacity, and growth potential.

What Documents and Information Are Required During the Due Diligence Process?

Lenders may request financial statements, the current cap table, financial projections, details on the use of funds, legal and regulatory compliance information, and other documents.

How Long Does the Unitranche Deal Structuring Process Typically Take?

The duration can vary, but Unitranche financing is often known for its expedited transaction process, taking closer to a few weeks than a few months.

What Happens in the Event of Default or Financial Distress?

The terms of default, repayment hierarchy, and potential actions by the lender in the event of financial distress should be clearly outlined in the Unitranche agreement.

Wrap up - Raising unitranche debt in 2024

Unitranche debt, at its core, simplifies the borrowing process for startups by consolidating senior and subordinated debt into a single facility. This financing model offers startups a simplified structure, streamlined negotiation processes, flexibility, and potential cost savings. However, as with any form of financing, it comes with its own set of potential disadvantages, including a higher headline interest rate (compared to strictly senior debt), and limited renegotiation options.

If you’re interested in raising unitranche debt we’d love to help, get in touch with us!

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