There are times when the lender, or the company, prefer to fund in tranches rather than all at once. The structure of a tranched loan will differ based on whether a tranche is drawable at the lender’s option or at the borrower’s option.

This structure is typically preferred when the requested loan size is large relative to a company’s current profile. The lender might suggest funding an initial amount with additional amounts coming later once milestones are achieved. In this case a company should be comfortable that it can achieve the milestones and, if missed, the lack of funding won’t harm it.

A borrower might prefer tranching when it is unsure the capital is needed. Why pay for a loan you won’t use? As with delayed draws, lenders will typically want to structure a draw at the company’s option such that the money isn't drawn when the company is under performing and running out of cash.

When considering a tranched loan the question of when warrants are earned will come up. My view on this is that when the company chooses whether to draw or not the warrants should be earned at the outset. If the lender makes the choice, based on milestones, the second tranche of warrants should be earned when the company meets the milestone and draws the funding.

Company tip: If you or your lender are considering a tranched loan be sure to model the cash flows so you know you will have enough availability.