the facts are clear: start-ups are finding it increasingly difficult to secure funding, and even unicorns seem cornered, with many lacking both capital and a clear exit.
But equity rounds aren’t the only way a company can raise money: alternative, non-dilutive funding options are often overlooked. Going into debt may be the right solution when you’re focused on growth and can see a clear ROI on the capital you deploy.
Not all providers of capital are created equal, so seeking financing is not just about to assure capital. It’s all about finding the right funding source that matches both your business and your roadmap.
Here are four things to consider:
Does this match my needs?
It’s easy to take for granted, but securing financing starts with a business plan. Do not 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 operations? The answer should influence not only the amount of capital you seek, but also the type of financing partner you seek.
Start with a concrete plan and make sure it aligns with your financing structure:
- Match the payment terms with the expected use of the debt.
- Balance working capital needs with growth capital needs.
It’s understandable to expect a one-time funding process that sets up the next round later, but that can be more expensive than you think in the long run.
Your repayment term must be long enough for you to deploy the capital Y see returns. If not, you may end up paying the loan off with the principal.
Let’s say, for example, that you raise funds to enter a new market. She plans to expand her sales team to support the move and build the cash flow needed to pay off the loan. The problem here is that it will take months for new hire to ramp up.
If there isn’t enough delta between the time it starts to rise and the time you start paying down, you’ll pay off the loan before your new seller can generate income that allows you to see ROI on the amount you borrowed.
Another issue to consider: If you’re financing operations rather than growth, working capital requirements may reduce how much you can deploy.
Let’s say you finance your ad spend and plan to deploy $200,000 over the next four months. But the MCA loan payments you took out to finance that expense will eat up your income, and the loan will be further limited by a minimum cash covenant of $100,000. The result? He got $200,000 in funding, but can only implement half of it.
With $100,000 of its financing locked up in a cash account, only half of the loan will be used to fuel operations, which means it will likely miss its growth target. What’s worse, since you can only implement half of the loan, your cost of capital is effectively double what you had planned for.
Is this the right amount for me right now?
The second consideration is balancing how much capital you need to act on your short-term goals against what you can reasonably expect to get. If the amount of financing you can get isn’t enough to move the needle, it may not be worth the effort required.