Growing with Your Facility

Growth conversations with capital providers often start in the wrong place. An originator asks for a larger commitment, gets one, and then discovers that nothing changed about how much cash is available to fund next month's originations. The commitment was not the constraint that was binding at the time.

What governs your draw is eligible collateral multiplied by the advance rate, less deductions, capped by the commitment, and subject to the drawdown conditions and covenants in your documents. Growing your funding usually means moving the collateral or the advance rate, funding the equity gap that appears when you do, and making sure the commitment is large enough not to bind later.

Work out which constraint is binding

Run the test on your own facility before you ask for anything. Take current eligible collateral, apply the advance rate, subtract reserves and other deductions, and compare the result to both your drawn debt and your commitment. Three outcomes are possible.

If the borrowing base is well below the commitment, the current constraint is collateral. A larger commitment adds nothing to today's availability, though it may still be worth having if you expect the collateral to grow past the existing commitment during the facility term.

Collateral is not the only thing that can stop you drawing. Covenant headroom, conditions precedent to each draw and your own liquidity position all bear on whether a request funds, so check those alongside the base calculation.

If the borrowing base is close to the commitment, the constraint is genuinely the commitment, and an upsize is the right ask.

If drawn debt is close to both, you are running with no headroom, and the conversation should include a buffer rather than a number that leaves you back here in two months.

The upsize that funds nothing

The following case is fictional and stated in US dollars. It assumes an advance rate of 75% and, for clarity, no reserves or other deductions.

Your commitment increases from 10m to 15m. Your eligible pool is 12m. Applying the advance rate, 12m at 75% supports 9m of debt. That is your maximum draw. The commitment moved by 5m and your available debt did not move at all, because the collateral limit binds well below both the old and the new commitment.

You have paid legal and arrangement costs for the amendment, and you may now be paying an unused commitment fee on a larger undrawn balance. If your facility charges on undrawn amounts, the upsize made your funding more expensive without adding anything to today's availability. That fee mechanic is set out in facility fees.

The larger commitment may still be worth the cost if you expect to grow into it before the facility matures, if the value of having capacity arranged exceeds its fees and other costs. Judge it against your origination plan, not against the current month.

What it actually takes to draw 12m

Continue the fictional case. You want to draw 12m rather than 9m.

At a 75% advance rate, 12m of debt requires 16m of eligible collateral. Assume for simplicity that your entire pool is eligible, so the total pool must grow from 12m to 16m. A 16m pool funded with 12m of debt requires 4m of equity, before transaction costs.

Where are you today? A 12m pool funded with 9m of debt means you have 3m of equity in the structure. Growing to the target therefore requires 1m of additional equity and 3m of additional debt. The debt is within the 15m commitment, assuming the draw conditions are met at the time. The equity is the piece you have to find.

This arithmetic assumes the whole pool is funded on the facility at the stated advance rate at a point in time. In practice retained earnings, the timing of collections and any assets you hold outside the facility all change the equity you need to inject and when. Build it month by month against your own origination and collection profile before you rely on the 1m figure.

After drawing 12m, 3m of the 15m commitment remains unused. Whether that undrawn balance carries a fee depends on your documents.

The pattern generalises. At any advance rate below 100%, growing your book requires equity in proportion to the gap. At 75%, every additional dollar of assets requires 25 cents of equity. Originators who plan growth in terms of debt capacity alone hit this wall at exactly the moment their origination engine is working best.

Model your equity need

Before you negotiate anything, model the equity requirement across your growth plan month by month. Include the equity portion of new originations, the cash you have committed to reserves, transaction costs on any amendment, and your operating cash needs. Then compare that to your available sources: retained earnings, equity raise, asset sales, or a higher advance rate.

Three routes reduce the equity tied up per dollar of assets. The first two do so by increasing debt against the same collateral, which is additional debt funding rather than newly earned equity, and neither creates profit.

A higher advance rate reduces equity per dollar of assets directly. Moving from 75% to 80% on a 16m pool reduces required equity from 4m to 3.2m. Providers price advance rate against performance data, so this ask works best after several clean reporting cycles with static pool data supporting your loss assumptions.

Improving eligibility converts assets you already hold into borrowing capacity. If 1m of your pool is ineligible for documentation reasons rather than credit reasons, fixing the files supports a further 750k of debt at a 75% advance rate, provided you have commitment headroom, no offsetting deductions and the draw conditions are satisfied. It costs operations time rather than capital. Review your eligibility criteria exception report before you ask for anything else.

Selling assets recycles equity. A whole-loan sale or a forward flow arrangement returns your equity from seasoned assets so it can fund new production. Pricing depends on the assets and the buyer: sales at, above or below par are all possible, and what you give up is the discount, if any, plus the economics you would have earned by holding.

Amendment, accordion or new facility

The route you take depends on what you need to change and how much room the existing structure gives you.

An accordion is worth understanding precisely. Some are committed increases exercisable on stated conditions. Others are an agreed process with the provider retaining discretion on whether to fund. Those are very different rights, and the label does not tell you which one you have. Read the clause and ask who approves the increase internally at the provider, and how long that approval historically takes.

New assets, geographies and tenors are not automatically eligible

Growth often means product change, and product change collides with eligibility definitions written for what you originated at closing.

A new asset type, a longer tenor, a different origination channel, a new state or country, a different borrower segment: each of these may fall outside your current definitions even though the credit is sound. Your facility may also carry concentration limits that cap how much of a given segment can count toward the base, which means the first tranche of a new product is eligible and the rest is not.

Raise this before you originate, not after. An amendment negotiated with 500k of the new product on your balance sheet is a different conversation from one negotiated with 4m of it sitting ineligible. Give your provider the data they need to underwrite the change: how the new segment differs, what evidence you have on its performance, and how your credit policy addresses it.

Operational capacity scales too

Growth stresses the parts of the business that do not appear in the borrowing base. Collections volume rises with the book. Reconciliation work rises with transaction count. Reporting complexity rises with product variety, because more definitions mean more logic to maintain and more places for the numbers to diverge.

Check three things before you commit to a growth plan. Whether your servicing operation can absorb the volume without the exception queue ageing. Whether your reporting extraction handles the new product without manual intervention, using the controls described in reporting and compliance. Whether your backup servicing arrangement covers the new asset type at all, since many engagements are scoped to specific products.

A capital provider evaluating an upsize will ask these questions during their own review. Having the answers ready shortens the process considerably.

Sequencing the ask

Work in this order. Establish which constraint actually binds, using your own current numbers rather than an assumption. Model the equity requirement across the growth plan and identify the source. Fix eligibility exceptions you can fix without anyone's consent. Then approach your provider with a specific request, supported by the performance data that justifies it, and with a clear statement of what you need changed: size, advance rate, eligibility definitions, concentration limits, or some combination.

Bring the conversation early enough that a decline still leaves you options. Approaching a provider days before you need the capacity narrows your alternatives to whatever they offer, and the terms follow accordingly. The broader negotiation dynamics are set out in negotiating terms. If your growth plan requires funding that no revolving facility will provide at reasonable cost, that is the point at which a term ABS takeout becomes worth scoping rather than the point at which you wish you had.