The facts are clear: Startups are finding funding increasingly difficult to obtain, and even unicorns seem cornered, with both capital and a clear exit severely lacking.
But equity rounds aren’t the only way for a company to raise money — alternative and other non-dilutive financing options are often overlooked. Taking on debt can be the right solution when you are focused on growth and can see a clear ROI from the capital you deploy.
Not all capital providers are equal, so the search for financing is not just about to secure capital. It’s a matter of finding the right funding source that fits both your business and your roadmap.
Here are four things to consider:
Does this match my wishes?
It’s easy to take for granted, but securing financing starts with a business plan. Don’t seek funding until you have a clear plan for how you will use it. For example, do you need capital to finance growth or for your day-to-day business? The answer should affect not only the amount of capital you are looking for, but also the type of financing partner you are looking for.
Start with a concrete plan and make sure it matches the structure of your financing:
- Match the repayment terms to your expected use of the debt.
- Balance the need for working capital with the need for growth capital.
It’s understandable to hope for a one-time funding process that determines the next round well into the future, but that could be more expensive than you realize in the long run.
Your repayment term must be long enough to deploy the capital and see the returns. If not, you may end up paying off the loan with the principal.
For example, say you raise funding to enter a new market. You plan to expand your sales force to support the move and develop the cash flow needed to repay the loan. The problem here is that the new hire takes months to get going.
If there isn’t enough difference between when you start ramping up and when you start paying off, pay back the loan before your new seller can start bringing in revenue so you can see the ROI on the loan amount.
Another point to keep in mind: If you’re financing operations rather than growth, working capital requirements can reduce the amount you can commit.
Let’s say you fund your ad spend and plan to put $200,000 over the next four months. But payments on the MCA loan you took out to fund those expenses will eat into your earnings, and the loan will be further limited by a $100,000 minimum cash covenant. The result? You’ve secured $200,000 in funding, but you can only deploy half of it.
With $100,000 of your funding in a cash account, only half of the loan is used to drive business, meaning you’re unlikely to meet your growth target. What’s worse, since you can only deploy half of the loan, your cost of capital is effectively double what you planned.
Is this the right amount for me at the moment?
The second consideration is the trade-off between how much capital you need to meet your short-term goals and what you can reasonably expect. If the amount of funding you can get isn’t enough to move the needle, it may not be worth it.