This resource intends to provide an overview of banking practices when it comes to leverage effect: what you can expect as a founder, what is expected from you, etc. This study only concerns banks. It doesn’t account for grants, subsidies or other non-dilutive fundings.
First off, what is leverage?
Leverage is the strategic use of borrowed capital, like debt, to increase the total capital for operations or expansion. By using leverage, a company can access more funds than sole equity, enabling it to expand, invest in new projects, or grow. Attention, debt leverage introduces risk, as the borrowed amount must be repaid regardless of the performance.
Co-banking strategy
Raising debt, collaborating with multiple banks allows to leverage their unique strengths and networks. It also mitigates risk for lenders, that will be more inclined to finance you as it shows financial robustness
🔎 Quick Access:
- General Expectations
- Saas Companies
- DeepTech Companies
- Loan Terms and Specificities
- Duration and Rates
- Ratios by Development Stage
- Trade Counterparts and Collaterals
- What will bank negotiate with you?
- What collaterals can be expected?
- Analysis and Process
- What do banks look at?
- What is the process?
- Building a Strong Relationship with Lenders
- Transparency and Best Practices
- Preferred Bank and Agencies Contacts
- 🇫🇷 FRANCE
- Useful resources and related contents
General Expectations
In today’s financial landscape, debt markets are experiencing lender-favorable conditions. As banks tighten lending criteria and investors seek safer bets, founders face increased scrutiny when looking to secure financing. It is still a good time to talk to banks, know however that it comes with more stringent requirements and higher expectations from lenders than before. Banks will look more often at your path to profitability.
Saas Companies
SaaS: strong expectations from D-1
In the SaaS sector, banks typically have high expectations, especially for startups in the Seed or Series A stages.
What do banks expect from you?
- Strong key business performance indicators, especially around traction, such as revenue, CAC, retention.
- At least 12 to 18 months of runway before considering a bank loan.
- A POC is the bare minimum. It is difficult for banks to finance companies that don’t yet commercialise.
Banks are more focused than ever on de-risking. Founders must show traction, stability, and clear financials to secure financing.
DeepTech Companies
Deeptech: lower leverage ratios
Deeptech often face financial hurdles due to the complexity of their projects and the time needed to reach a commercial market.
Banks are willing to fund your companies but they will take extra care and:
- Analyse the strength of the team: are they complementary, experienced in their fields, are they well advised, is it there first rodeo, etc.
- The disruptive nature of the technology: do we believe it is going to completely change the landscape.
- Offer a more progressive disbursement of funds, with clear milestones to be achieved before each tranche is released. This helps mitigate risk for both parties.
Thierry Maurer, Directeur de Centre d'Affaires Entreprises Innovantes et Start-up @BPRI"When it comes to Deeptech, the best validation comes from the investors already on board. It validates the team’s expertise and the project’s ambition."
Loan Terms and Specificities
Duration and Rates
- Standard loan term: 48 to 60 months (4-5 years), aligning with BPI France guarantees, which typically covers 40% to 80% of the amount loaned.
- Standard loan size: from €1M to €25M, with an average around €4M, generally 20% to 40% of the equity round.
- Interest rates: mostly hover between 4% and 5.5%, although rates can reach as high as 8%, depending on the risk profile of your company and lender conditions.
- Deferred reimbursement: No deferred payments or pauses in instalments are offered due to current lender-favorable conditions. Moreover, if you don’t start paying now, debt will be higher later, which can be a deterrent for a new debt round at a later stage.
Ratios by Development Stage
Equity financing can help your ability to secure a loan. Here are the ratio observed by our partner Start2Scale over 70 deals since 2022:
Maïté Vaillant, Directrice Commerciale, Centre d’Affaires Innovation @Société Générale"We know you are tired after your fundraising. But remember that your leverage effect is based on your treasury funds. The longer you wait and burn cash, the smaller it gets."
Trade Counterparts and Collaterals
What will bank negotiate with you?
- Covenants: binding agreements requiring a minimum cash reserve at the end of the year (e.g., Dec. 31st) are common. If this cash reserve is not met, founders may be obligated to inject additional funds to mitigate risks.
- Guarantees, such as BPI guarantees and liens on business assets are often required.
- A key clause, known as "intuitu personae", which may trigger renegotiation of credit terms if the majority ownership of the company changes, particularly during acquisitions.
- Banks often aim for “pari passu” agreements, meaning equal participation for an equal upside for all debt providers involved in the transaction.
- Domiciliation of your flows and or deposits, which are an important part of risk mitigation. While this may seem restrictive if you’re using neobanks, it also helps build a long-term relationship of trust.
What collaterals can be expected?
- Personal guarantees (to be avoided if you've already raised capital).
- Pledge of business assets: This is the most common form of collateral, typically involving the assets of the business (fonds de commerce). Not always relevant for SaaS companies.
- Pledge of trademarks: The trademark must be registered with the INPI, and the pledge can be enforced in case of restructuring or liquidation.
- Pledge of savings: For a loan of 500K, you would need to pledge 100K as collateral, with 25K being released annually over a four-year period.
Analysis and Process
What do banks look at?
For banks, the financial risk at this stage is real. They will analyse your agility, deep dive in your hypothesis and assess if the business plan and target debt level is coherent with your current business and future needs. The goal is to assess the long term viability of your company.
Thierry Maurer, Directeur de Centre d'Affaires Entreprises Innovantes et Start-up @BPRI"Leveraging with banks is harder now, specifically after the bubble. There are more criteria taken into account. You can not take for granted what was done 2 years ago at your earlier series or with another company."
More banks now have a scoring system for their investments, using criteria from equity investors. This scoring is qualitative and the human connection remain an important part of the evaluation.
However, here are some majors points: 👇
Stress testing the business plan, and the financial maturity of the startup, is common. Some of our partners recommend outsourcing financials projections to professionals, especially early on, especially if founders have little experience.
What is the process?
- As a founder, it's best to start conversations with two or three banks well before your closing.
Nizar Dahmane, Head of Tech Business Unit @La Banque Postale CIB"The most successful founders negotiate with multiple banks simultaneously. This allows to secure larger loans, which helps minimize equity dilution."
- Take contact with a “chargé d’affaires”. He will help you prepare your application that will be analysed on the criteria described in Leveraging your Fundraising with banks - What do banks look at?
Nizar Dahmane, Head of Tech Business Unit @La Banque Postale CIB"You should talk to banks during or just after your fundraising because you’ll have the ability to use the same and already up to date dataroom. On our side, it also facilitates the due diligence."
- Once ready, your application is sent to the risk committee. If well-prepared, and if you are able to promptly address any questions, the process can be quick, ranging from 2 to 6 weeks. The risk committee’s speed is not within control.
Pro Tip: make sure you're eligible for BPI or EIF guarantees, as they can be a key advantage for securing your loan. Keep in mind that you may not qualify: if a fund holds a majority stake, if you are publicly traded with a high market cap. or if you are not incorporated in Europe.
- Negotiation of terms: If the risks commission gives a favorable answer, you can negotiate and finalize terms with the bank (rate, payment schedules, covenants, trade counterparts).
- Conditional approval: You may receive conditional approval, contingent on meeting certain requirements (e.g., collateral, additional guarantees).
- Legal review: Both parties review the loan agreement to ensure compliance and legal soundness.
- Loan agreement and disbursement of funds: Once all terms are agreed upon, you and the bank will sign the final loan agreement before disbursing the funds according to the agreed schedule.
Building a Strong Relationship with Lenders
Transparency and Best Practices
- Transparency: this is one recurring element from the interviews. If a company hides the existence of other loans or banks involved, this can create a climate of mistrust, difficult to repair in the long term. Remember that bankers have access to national credit files.
Thierry Maurer, Directeur de Centre d'Affaires Entreprises Innovantes et Start-up @BPRI"Brokers often approach multiple banks, but they do so without keeping all parties informed. This lack of transparency may backfire in the long term, as they could find it difficult to gain trust for futur debt rounds.”
- Don’t play foul: one of the trade counterpart from banks will be to access a share of your flow, equivalent to the share of debt they have in your company (i.e if there are 2 banks, they will ask 50% of the flows). They can’t force you to do so, but if you don’t play the game during your first loan agreement, don’t bother asking them for another round with them.
Maïté Vaillant, Directrice Commerciale, Centre d’Affaires Innovation @Société Générale"If you say yes to everything during negotiation but don’t play by the rules from the beginning, you won’t be able to get new funding from the same bank. Trust is key in relationships, especially for young companies."
- Take care of your debt ratio: Always pay attention to your debt-to-equity ratio to avoid being classified as a “company in difficulty.” To stay compliant, ensure that total equity is greater than half of the sum of share capital and share premiums. If not, the company may be considered in difficulty, meaning European support (such as EIF and BPI) is no longer an option.
One best practice is to review this ratio at every financial close or general assembly. If there are losses, consider a "balance sheet adjustment" to offset the losses by reducing the share premium, ensuring your financials remain healthy and avoid triggering difficulty status.
Fatou Diagne, Managing Partner @Bootstrap Europe"It’s important to understand that debt is a powerful lever, but it must be used wisely. Founders must never compromise the company’s equity and cash flow balance, they need to be cautious to avoid having too high a debt ratio that would limit their options in the long-term."
Preferred Bank and Agencies Contacts
🇫🇷 FRANCE
SmallCaps
sophie.magne@rivesparis.banquepopulaire.fr Thierry Maurer Directeur du centre d’affaires innovation thierry.maurer@rivesparis.banquepopulaire.fr
🇺🇸United States
Memo Bank Maxime Bana Account Executive
maxime.bana@memo.bank
Useful resources and related contents
Book an office hour with Jean-Baptiste Cousin, Partner @Smash Group 👇
Read more about banking practices 👇
Cash Management & Responsible Banking Practices
Contact our partners for Debt or other non-dilutive fundraising 👇