Playbooks
What capital providers care about
What capital providers care about
Capital providers evaluating your deal are running two parallel tracks of diligence: one on you as a company, one on your collateral. Understanding both tracks, how they’re structured, and what actually moves the needle will help you prepare more effectively and avoid the surprises that slow deals down or kill them.
How capital providers are actually thinking
Every question a capital provider asks maps back to one of three concerns:
- Will this originator still be here in three years? (Originator risk)
- Will these assets perform as modeled? (Collateral risk)
- If things go wrong, can we recover our capital? (Structural protection and enforcement)
This framing is useful because it helps you anticipate what a question is really about. When a capital provider asks to see your org chart, they’re asking about question one. When they request 50 loan files for re-underwriting, they’re investigating question two. When they ask about your SPV structure and true sale opinion, they’re working on question three. Understanding the bucket helps you answer the question the right way.
Originator diligence
Capital providers run a credit assessment on the originator as a company, separate from the collateral analysis. This is the part originators consistently underestimate. Collateral performance matters, but it doesn’t overcome a capital provider’s concerns about whether the originator can survive long enough to service the portfolio.
Financial condition
What they’re looking for:
- Minimum tangible net worth (TNW): varies by deal size, typically your facility size x 10-15% as a floor. A $50M warehouse may require $5M-$10M in originator TNW.
- Liquidity runway: most capital providers want to see 6-12 months of operating cash without new origination
- Profitability trajectory: losses are acceptable; losses with no clear path to profitability are not
- Corporate debt: existing debt on originator balance sheet that’s senior to their claim creates intercreditor concerns
What raises flags:
- Audited financials more than 30 days overdue
- Qualified audit opinion
- Material related-party transactions not disclosed upfront
- Capitalization via convertible notes at aggressive valuation (signals future dilution that may affect originator stability)
What they’ll ask for:
- 2-3 years audited financial statements (or from inception if younger)
- Most recent management accounts (unaudited, within 30 days)
- Cap table and debt schedule
- 12-month budget with assumptions
Management and team
What they’re looking for:
- Experience: have the founders and senior team done this before? Built a lending business, managed credit losses, operated a structured facility?
- Depth: is performance dependent on one or two key people? Who’s the backup if the CEO leaves?
- Incentive alignment: do founders have meaningful equity at stake? Are they there because they’re economically motivated to make this work?
What raises flags:
- First-time fintech founders with no credit background running a consumer lending business
- High management turnover (two heads of credit in 18 months is a signal)
- Founders with a history of failed or distressed lending businesses
- Founders not in the room for key diligence sessions (signals they don’t own the details)
What they’ll ask for:
- Bios and resumes for founders and senior credit/operations leadership
- Reference calls (usually 2-3 references per key person)
- Org chart (current and planned)
- Any prior litigation or regulatory action involving management
Credit and underwriting controls
What they’re looking for:
- Is credit policy written down and followed? Can you hand them a credit policy manual and have it match the actual loan tape?
- How is underwriting policy approved and changed? Who has authority to grant exceptions, and are exceptions tracked?
- Are there controls on origination volume relative to capacity? Capital providers are wary of originators who will sacrifice quality for volume when capital becomes available.
- Is fraud prevention systematic or ad hoc?
What raises flags:
- Informal or undocumented underwriting guidelines
- Exception rates above 10-15% on the loan tape (asset class dependent)
- Concentration in underwriting staff creating key-person risk
- No independent review of originations: no compliance function, no sampling protocol
What they’ll ask for:
- Credit policy manual and underwriting guidelines (current version plus history of changes)
- Exception tracking report
- Sample of 20-50 individual loan files for re-underwriting
- Evidence of third-party compliance review or audit
Servicing operations
What they’re looking for:
- Can you actually collect on these loans if the borrower goes delinquent? Servicing competency is underrated by originators; it’s not underrated by capital providers who’ve had to replace a servicer mid-deal.
- Systems: loan management system, payment processing, collections workflow
- Reporting capability: can you produce accurate, timely tape data?
- Delinquency management: what happens at 30 days past due? 60 days? 90 days? Is the process documented?
What raises flags:
- Using a third-party servicer with no backup: counterparty risk with no visibility
- Manual collections processes (spreadsheet-based, not systematic)
- Inability to produce a clean loan tape on short notice (data quality is a proxy for operational competency)
- Missing or inconsistent payment histories on the tape
Litigation and compliance
What they’re looking for:
- Material pending litigation that could impair the originator’s ability to operate
- Regulatory actions: CFPB, state regulators, banking department
- Licensing: are you licensed to originate in every state where you have borrowers?
- Usury: are your loan rates defensible in every jurisdiction?
What raises flags:
- Any active regulatory consent order
- Licensing gaps in high-concentration states (if 20% of your portfolio is in California and you have a licensing issue there, that’s material)
- History of class action lawsuits around rate or disclosure practices
Collateral diligence
This track runs in parallel with originator diligence, not after it. Capital providers are simultaneously assessing whether the company can survive and whether the collateral will perform.
Tape analytics
The first thing every capital provider does with your loan tape is a series of standard analytics. Understanding what they’re running helps you pre-validate before submission and shows up in your data room quality.
- Data completeness check: What percentage of fields are populated? What percentage of records have payment history? A tape with more than 5% missing data in key fields (origination date, current balance, payment history) signals poor data infrastructure.
- Stratification tables: Distribution by FICO, loan size, geography, origination vintage, loan term, current status. Looking for concentration flags: more than 15% in a single state, more than 20% with a single employer, etc.
- Static pool construction: Group originations by vintage quarter; track each vintage’s cumulative net loss, 30-day delinquency rate, and prepayment speed. This is the core analytical work.
- CDR/CPR/CNL by vintage: Are the curves stable and predictable? Are newer vintages tracking worse than older ones? Is prepayment speed unusual?
Thresholds that create concern:
- Single-state concentration above 15-20% (varies by asset class)
- Single obligor or employer above 2-5% of pool
- Any vintage showing cumulative net losses materially above stated base case assumptions
- Prepayment speeds significantly above model (may indicate adverse selection)
- Weighted average FICO degradation across recent vintages without an explanation
Re-underwriting sample
Capital providers will pull a random sample of loan files (typically 20-100, with larger samples for larger deals) and re-underwrite each loan against your own stated guidelines. They’re looking for:
- Does the loan meet stated eligibility criteria?
- Are income verification, employment verification, and credit pulls consistent with guidelines?
- Are there undisclosed exceptions?
- Is documentation complete?
| Sample failure rate | What it means for terms |
|---|---|
| 5-10% of sample fails re-underwrite on documentation | Usually addressable with reps and warranties |
| 10-20% of sample fails | Raises concerns about systematic quality; may require tighter eligibility criteria or lower advance rate |
| More than 20% fails | Potential deal-killer, or dramatically tighter terms |
Illustrative pricing. See pricing disclaimer.
Performance benchmarking
Capital providers have access to comparable data: public ABS performance, rating agency published transition studies, Bloomberg ABS surveillance. They will benchmark your portfolio against comparable public deals, their own portfolio of similar originators (if they have one), and rating agency assumptions for your asset class and credit tier.
If your loss rates are better than comps, be prepared to explain why. Don’t dismiss the question. “Our loss rates are better because we originate differently” needs to become: “here’s our credit box, here’s how it differs from the comp set, here’s the origination geography and employment profile that explains the difference.” Skepticism about outperformance is appropriate from a capital provider who has been burned by originators overstating their differentiation.
Concentration and tail risk
Capital providers focus on tail risk: what could cause losses to be 2-3x your stated base case? Common concerns:
- Geographic concentration and correlation to regional economic conditions
- Employer or industry concentration (especially in business lending)
- Collateral vintage concentration (if a large percentage of pool originated in a single quarter, that quarter’s performance drives facility performance)
- Macro sensitivity: how do your losses move in a recession scenario? Have you modeled this?
Important: If you haven’t modeled a recession scenario, do it before you get to a capital provider. “We haven’t modeled a stress case” signals that you don’t understand your own tail risk. You don’t have to have lived through a recession, but you should have thought through one.
How pricing is determined
Pricing is not arbitrary. Capital providers price from a target return down, not from a market rate up. Understanding their cost structure helps you understand their floor and where there’s real room to negotiate.
The capital provider’s math
For a credit fund:
- Cost of capital = cost of LP equity + (if back-leveraged) cost of leverage
- Target net return to LPs: 10-18% depending on strategy
- Management fee and carry layer on top: adds roughly 150-300 bps to their effective cost
- Pricing floor on a senior secured warehouse: typically SOFR + 250-500 bps, depending on leverage and asset class
For a bank:
- Cost of funds = FTP (funds transfer price, typically close to overnight rate or short-term Treasury)
- RWA charge: how much regulatory capital must the bank allocate against this exposure
- Target ROE on the line: banks typically target 12-18% ROE on structured credit exposures
- A well-capitalized bank with low cost of funds can offer SOFR + 150-200 bps on a strong deal; a less efficient institution may need SOFR + 300 bps
For an insurance company (term ABS investor):
- Pricing driven by NAIC rating charge and return hurdle (typically 100-200 bps above benchmark for investment grade)
- Lowest-cost source for rated senior notes: SOFR + 80-150 bps for AAA, wider for lower-rated tranches
What you can influence:
- Originator quality signals (stronger originator = lower perceived risk = tighter pricing)
- Track record length and cleanliness
- Structural enhancements that reduce perceived risk (higher advance rate = more risk for them = higher cost for you)
- Competitive tension: running a process with multiple providers is the most effective single pricing lever available to you
Understanding the full fee picture
Don’t compare spread lines. Compare total cost of capital over the expected life of the facility, accounting for expected utilization.
| Fee Type | Typical Range | Notes |
|---|---|---|
| Undrawn commitment fee | 25-75 bps/year on undrawn | You pay this on committed but undrawn balance |
| Upfront/structuring fee | 50-150 bps of facility | One-time; reduces effective pricing over the life of the facility |
| Exit fee | 0-100 bps | Some providers charge on payoff; negotiate hard on this one |
| Annual admin/agency fee | $25K-$75K/year | Trustee and admin; usually in the waterfall |
| Unused facility fee | Same as undrawn | Sometimes structured differently |
Illustrative pricing. See pricing disclaimer.
Tip: Run the all-in calculation. A SOFR + 200 bps facility with a 50 bps undrawn fee at 60% utilization costs more than SOFR + 250 bps with no undrawn fee at 90% utilization. Build a simple model that applies each fee against your expected utilization profile before comparing term sheets.
Structural protections: table stakes vs. negotiable
Non-negotiable terms
Capital providers will not negotiate on these. Treat them as given:
- SPV structure: Assets must be in an SPV that is bankruptcy-remote from the originator
- True sale treatment: The asset transfer must qualify as a true sale; your counsel must deliver an opinion to this effect
- Perfection: First-priority security interest in the collateral, perfected under UCC
- Independent servicer standard: Servicing must be performed to a defined standard; capital provider has the right to replace servicer for cause
- Change of control consent: Capital provider must approve a change in control of the originator
- Material adverse change: Broad MAC clause; typically non-negotiable, though you can try to narrow the definition
Heavily negotiated terms
| Term | What they ask for | What you can realistically get | Key consideration |
|---|---|---|---|
| Advance rate | 70-80% on consumer credit | 80-85% with strong track record | Every 5 points of advance rate = 5% more capital efficiency |
| Eligibility criteria | Narrow definition matching their underwriting | Add asset class-appropriate carve-outs | Focus on criteria that will actually affect your pool |
| Delinquency triggers | Set at 90-110% of historical loss rates | 120-150% of historical loss rates with seasonal adjustment | Tight triggers trap cash at bad times; model your exposure |
| Concentration limits | 10% single state, 5% single employer | 15-20% single state with cure period | Match your actual origination geography |
| TNW covenant | 100-150% of facility size | 50-75% of facility size | Depends on your equity base |
| Excess spread distribution | Trapped in spread account | Released monthly above a minimum level | The mechanics of how you get your spread back |
| Reporting frequency | Monthly tape + weekly payment data | Negotiate reporting templates upfront | Agreeing to reporting you can’t produce is the most common mistake |
What to concede first
When you’re in term sheet negotiation and can’t move a capital provider off a position, there’s an order to concessions that matters:
- Concede on advance rate before you concede on spread. Advance rate is recoverable as your track record grows; spread is harder to renegotiate.
- Concede on reporting frequency before you concede on covenant levels.
- Concede on minor eligibility criteria before you concede on major ones (geographic concentration limits matter more than maximum loan age).
What gets deals done vs. what kills them
Common deal-killers
- No static pool data: You cannot get a structured facility without demonstrated performance history. Pre-deal meetings are fine; commit to a close-start date once you have 12+ months of data.
- Data quality issues: A tape with significant gaps or inconsistencies will fail diligence. Capital providers can’t underwrite what they can’t see.
- Licensing gaps: Discovered late in diligence, these can kill a deal or create significant indemnity requirements.
- Originator financial condition: If your last audit showed negative equity or your cash runway is less than 3 months, no capital provider will close.
- Management instability: Losing your CFO or Head of Credit during an active diligence process is often a deal-killer.
- Misrepresentation: Any material misrepresentation in the screening package, discovered during diligence, ends the deal.
What gets deals done faster
- A clean, organized data room that answers questions before they’re asked
- A consistent narrative: your deck, your tape, and your financial statements all tell the same story
- Responsive management: answering diligence questions within 24-48 hours signals operational competency
- Reference-ready: capital providers will call your existing capital providers and major borrowers; prepare those references in advance
- Knowing your numbers: your CFO and Head of Credit should be able to answer detailed questions about loss attribution, prepayment drivers, and portfolio concentration from memory, not from slides
How to position for better terms over time
The first facility establishes a baseline. Terms improve as you build a track record with the capital provider.
Year 1-2: Focus on performance consistency. Capital providers are watching whether your actual performance matches your projected performance. Surprises in either direction create friction, and negative surprises are much harder to recover from than you might expect.
Year 2-3: Request advance rate improvement or spread tightening. Come with data: three years of vintage performance, comparison to the advance rate/performance relationship you projected at closing. The ask should be data-driven, not a negotiation.
Year 3+: Consider requesting structural improvements (faster excess spread release, looser covenants, expansion of eligible assets). These typically require an amendment, which has a cost ($25K-$75K in fees); factor this in before requesting.
Building toward a second facility or term ABS:
- Document the track record under your current facility: months of performance, covenant headroom, no trigger events
- Start conversations with rating agencies 12-18 months before you need the rated facility
- Maintain a warm relationship with 2-3 potential new capital providers even when you’re not actively raising
Practitioner checklist
Before going to a capital provider:
- Static pool data: at least 12 months, ideally 24 months, structured by vintage
- Clean loan tape: validated for completeness, consistent field definitions, current as of within 30 days
- Audited financials: last 2-3 years, no qualified opinions
- Licensing confirmed: verify origination and servicing licenses in all active states
- Underwriting policy: current written policy, exception tracking in place
- Servicing documentation: servicing policy, delinquency management procedures, collections workflow
- Org chart: current team with relevant bios for key personnel
- References: prepare 2-3 references for key leadership who know your business well
- Data room: organized in tiers (screening materials separate from full diligence materials)
- Know your floor: before negotiating, understand your all-in cost of capital from each potential source