Why I’m using a credit facility to grow my startup

When it comes to financing, startups and established organizations will have vastly different experiences.

Traditional financing may not always be available to high-growth startups, and even when it is, it often depends on the founder’s personal financial picture and their company’s existing revenue. While larger companies can turn to banks and other financial institutions, new founders often have to turn to alternative sources of financing to grow their companies.

For my own company, I decided to look at alternative financing options to scale operations and expand our product road map. To accelerate growth, I decided to raise a small amount of debt equity in tandem with a large, revolving credit facility.

Here’s how and why I’m using a credit facility to grow my company.

Raising a credit facility

To start things off, I approached a small lender who was able to provide a $3 million credit facility.

Banks often can’t offer a line of credit to a startup or small business, especially to those that don’t have years of operating history, given their legacy approach to underwriting.

It was therefore clear to us that we needed to offer lines of credit for our customers. Our credit facility allows us to extend lines of credit to our customers, ramp up our product offerings rapidly, and incorporate that debt into our capital stack in a way that minimizes the long-term cost of capital, which that makes clear sense for our business.

To expand our offerings, I turned to alternative financing: In October 2021, we closed a $77 million funding round, of which $75 million was a revolving credit facility and the remaining was in equity. Later this year, we’ll finalize an all-stock acquisition to further enhance our technology and product road map.

How we did it

For our business model, raising a credit facility to fund all of the spend for our customers made the most sense.

Fintech startups have raised hundreds of millions in equity rounds and are using that money to fund customer spend. That route can be dilutive and would require us to give up more ownership of the company, which we didn’t want to do. Additionally, the economics of the credit facility worked more in our favor, as it lets us keep up with inbound demand.

To start things off, I approached a small lender who was able to lend a $3 million credit facility. This initial funding helped us get into the market, validate our product, and get the data we needed to expand our customer base and our team.

When it came time to raise additional funding, I took that information to my network of advisers, shareholders and investors, tapped inbound investor interest, and was able to refinance our existing line and put a larger one in place.

If you’re considering a credit facility, you will be able to forecast the amount you need based on current customers, amount of volume, and projected growth. Be sure to consider terms. Our terms are flexible and favorable to us, leaving us with enough room to profit.

While we didn’t hire a financial adviser to help with the process, we did lean on other advisers and investors to help us through the raise. There was a lot of learning on the go.

I would say that advisers are key for young startups. Talk to as many people as you can and always have an open mind in these conversations. Your advisers and networks are a fundamental gateway to accessing resources to grow your company. Even if you think you don’t have the right network, talk to the people you do know and ask for targeted introductions. Any new connections can get you one step closer to the advisers or resources you need.

We’re a small organization, so most of the team was aware of the process as it was happening. After we closed, we communicated the news in Slack and held an all-hands meeting where we spoke in detail about the process, the proceeds and what it would mean for the company.

You should be as communicative and as open as possible with your team, as it’s important for everyone to be aligned with the mission, vision, values and goals of the company. That’s one of the key factors that has helped us succeed thus far.

For a small but rapidly growing company, raising a large credit facility is a big undertaking, but it’s a good avenue to consider. In my case, the structure of a credit facility made a lot of sense alongside the structure of our business.

This is something founders of companies of all sizes should be clear about: Your financing and funding should always make sense with the structure and operational model of your business.

In situations where it’s not so clear, I recommend evaluating the debt market. Consider options like revenue-based financing, other non-dilutive capital, and/or venture debt to help you grow without giving up too much of your business.