The facts are clear: Startups are finding funding increasingly difficult to secure, and even unicorns appear cornered, with many lacking both capital and a clear exit.
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 might be the right solution when you’re focused on growth and can see clear ROI from the capital you deploy.
Not all capital providers are equal, so seeking financing isn’t just about securing capital. It’s a matter of finding the right source of funding that matches both your business and your roadmap.
Here are four things you should consider:
Does this match my needs?
It’s easy to take for granted, but securing financing begins with a business plan. Don’t seek funding until you have a clear plan for how you’ll use it. For example, do you need capital to fund growth or for your day-to-day operations? The answer should influence not only the amount of capital you seek, but the type of funding partner you look for as well.
Start with a concrete plan and make sure it aligns with the structure of your financing:
- Match repayment terms to your expected use of the debt.
- Balance working capital needs with growth capital needs.
It’s understandable to hope for a one-and-done financing process that sets the next round far down the line, but that may be costlier than you realize in the long run.
Your term of repayment must be long enough so you can deploy the capital and see the returns. If it’s not, you may end up making loan payments with the principal.
Say, for example, you secure funding to enter a new market. You plan to expand your sales team to support the move and develop the cash flow necessary to pay back the loan. The problem here is, the new hire will take months to ramp up.
If there’s not enough delta between when you start ramping up and when you begin repayments, you’ll be paying back the loan before your new salesperson can bring in revenue to allow you to see ROI on the amount you borrowed.
Another issue to keep in mind: If you’re financing operations instead of growth, working capital requirements may reduce the amount you can deploy.
Let’s say you finance your ad spending and plan to deploy $200,000 over the next four months. But payments on the MCA loan you secured to fund that spending will eat into your revenue, and the loan will be further limited by a minimum cash covenant of $100,000. The result? You secured $200,000 in financing but can only deploy half of it.
With $100,000 of your financing kept in a cash account, only half the loan will be used to drive operations, which means you’re not likely to meet your growth target. What’s worse, as you’re only able to deploy half of the loan, your cost of capital is effectively double what you’d planned for.
Is this the right amount for me at this time?
The second consideration is balancing how much capital you need to act on your near-term goals against what you can reasonably expect to secure. If the funding amount you can get is not enough to move the needle, it might not be worth the effort required.
On the other hand, in a world where unicorns exist, it’s easy to forget that bigger isn’t always better. You may think you need $1 million. But why? Do you have an immediate plan for that capital? Are you mistaking funding for validation of your business plan?
If your strategy outlines sequential $200,000 projects, then securing a relatively smaller loan that matches your current needs can:
- Lower payments: If you’re not deploying the capital, accepting an extra $800,000 in financing means you’re paying for money you’re not using. This results in wasted cash and wasted opportunity.
- Reduce risk: The greater the debt, the greater the risk.
- Target your focus: Focusing on the success of a smaller project can set you up for success you can build on in the future.
Entrepreneurs who view VC as their standard source of funding may reflexively think they need to take on a specific amount of debt to secure funding. The reality is: Alternative financing offers the opportunity to both fund your projects quickly and support future growth opportunities.
Does this funding support my growth?
Don’t forget that building a business is a long game, no matter your current capital requirements. This is true whether you’re looking for a line of credit to supplement off-season revenues, a term loan to drive expansion in a new market or one last contribution to complete your funding round.
When considering financing opportunities, check to see if your capital partner will allow you to access additional funding when you hit certain growth milestones. If the answer is yes, it signals that you have a capital partner willing to invest in your long-term growth goals.
To find a partner invested in providing capital in step with your growth, consider alternative financing options that:
- Optimize for cost of capital.
- Measure results to drive further investment.
- Fund continued, non-dilutive growth.
In short: The right financing partner can work with you – as a partner.
What does that look like? It can mean helping to monitor your cash flow to determine the right time for investing additional capital, or payback structures based on a percentage of your revenue rather than a fixed dollar amount. In either case, it means your partnership is mutually beneficial.
What are the requirements of payment?
I previously outlined situations when you may decide to take less funding than you originally sought to. There will also be times when the right move is accepting less than you’re offered. Not all financing partners support this, however.
Look for a partner who will allow you to withdraw what you need, when you need it. You’ll find uses for the additional capital as you grow, but that growth might not happen as soon as you expected.
Say you take $500,000 of $1 million offered. The right lender will keep the remaining $500,000 on the table, available for you to use it when you need it. The result is a sort of virtuous cycle: You receive the right amount of funding to grow now and only pay for what you take (rather than letting the money sit in a bank). Then, your lender increases your access to capital over time, always keeping a bit of dry powder for you at the ready.
The choice is yours
While we’ve been focusing on loans and terms of payment, don’t forget that raising capital is about more than money — it’s a matter of human capital. The reality is fundraising is complex and time consuming. So, it’s understandable to hope for a one-and-done financing process that sets the next round far down the line.
However, that may be costlier than you realize in the long run. Over the years, many non-dilutive alternative financing options have come into play. With so many options available, it’s important to do your due diligence when comparing providers.
Don’t forget to scrutinize your term sheets. Look for things like dilutive provisions (warrants or success fees are costly), financial covenants (anticipate whether your business can meet them), payback structure (consider if it makes sense for your business) and reporting/engagement (how much effort you need to put in).
Don’t forget: Flexibility is key. How flexible is your funding partner? Alternative benefits like continuous underwriting may signal that your financing partner is willing to support future growth opportunities beyond your current loan.