The facts are clear: startups are finding it increasingly difficult to get funding, and even unicorns seem 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, non-dilutive financing options are often overlooked. Borrowing may be the right solution when you are focused on growth and can see a clear return on investment on deployed capital.
Not all providers of capital are created equal, so the search for financing is not just about raising capital. It's all about finding the right funding source that fits both your business and your roadmap.
Here are four things to keep in mind:
Does it fit my needs?
It's easy to take for granted, but getting funding starts with a business plan. Do not seek financing until you have a clear plan of how you are going to 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 financial partner you seek.
Start with a concrete plan and make sure it fits into your financing structure:
- Adapt repayment terms to the intended use of the debt.
- Balance working capital needs with growth capital needs.
The repayment term must be long enough for you to use the capital and see the benefits. If it isn't, you may end up paying off the loan with the principal.
Let's say, for example, that you get funding to enter a new market. She plans to expand her sales team to support the move and build the cash flow needed to repay the loan. The problem is that the new hire will take months to get going.
If there isn't enough time between when you start to get off the ground and when you start to repay, you'll have to repay the loan before the new seller can generate income to see a return on investment on the amount borrowed. .
One other thing to keep in mind: If you're funding operations rather than growth, your working capital needs may reduce the amount you can deploy.
Let's say you finance your advertising spend and plan to spend $200.000 over the next four months. But the MCA loan payments you've taken out to finance that expense will eat away at your income, and the loan will be further constrained by a $100.000 minimum cash covenant. What's the score? You've raised $200.000 in funding, but you can only use half of it.
With $100.000 of its financing in a cash account, only half of the loan will be used to fuel operations, meaning it's unlikely to hit its growth target. And what's worse, since you can only use half of the loan, your cost of capital is effectively double what you had anticipated.
Is it the right amount for me right now?
The second consideration is to weigh how much capital you need to act on your short-term goals against what you can reasonably expect to achieve. If the amount of funding you can get is not enough to move the needle, it may not be worth the effort required.
Then again, in a world where unicorns exist, it's easy to forget that bigger isn't always better. You may think you need a million dollars. But why? Do you have an immediate plan for that capital? Are you confusing financing with the validation of your business plan?
If your strategy outlines $200.000 sequential projects, you can get a relatively smaller loan that meets your current needs:
- reduce payments: If you're not deploying capital, accepting an additional $800.000 in financing means you're paying for money you're not using. This translates into a loss of money and opportunities.
- Reduce risk: The greater the debt, the greater the risk.
- Focus attention: Focusing on the success of a smaller project can set you up for success that you can build on in the future.
Entrepreneurs who see venture capital as their usual source of financing may reflectively think that they need to borrow up to a certain amount to secure financing. But the reality is different: Alternative financing offers the opportunity both to finance your projects quickly and to support future growth opportunities.
Does this funding support my growth?
Don't forget that starting a business is a long-term game, regardless of your current capital needs. This is true whether you're looking for a line of credit to supplement off-season income, a term loan to fuel expansion into a new market, or a last-ditch contribution to complete your round of financing.
When considering financing opportunities, check to see if your equity partner will allow you to access additional financing when you reach certain growth milestones. If the answer is yes, it's a sign that you have an equity partner willing to invest in your long-term growth goals.
To find a partner willing to provide capital as you grow, consider alternative financing options that:
- Optimize the cost of capital.
- Measure results to drive new investment.
- Finance continued and non-dilutive growth.
In short: the right financial partner can work with you, like a partner.
What do means this? It may mean helping to monitor your cash flow to determine the right time to invest additional capital, or repayment structures based on a percentage of your income rather than a fixed dollar amount. In either case, it means that your partnership is mutually beneficial.
What are the payment requirements?
I have previously described situations where you may decide to accept less funding than you originally intended. There will also be times when the right thing to do is to accept less than what you are offered. However, not all funding partners support this.
Find a partner that lets you withdraw what you need, when you need it. You will find uses for the additional capital as you grow, but that growth may not come as soon as you hoped.
Let's say you accept $500.000 out of $1 million that you're offered. The right lender will keep the remaining $500.000 on the table, available for you to use when you need it. The result is something of a virtuous circle: You receive the right amount of financing to grow now, and you only pay for what you take (instead of letting the money sit in a bank). Your lender then increases your access to capital over time, always keeping some dry powder ready for you.
You choose
Although we have focused on loans and payment terms, we must not forget that raising capital is more than just money: it is a matter of human capital. The reality is that fundraising is complex and time consuming. So it's understandable to expect a one-time funding process that sets the next round a long way off in time.
However, in the long run it can be more expensive than you think. Over the years, many non-dilutive alternative financing options have emerged. With so many options available, it's important to exercise due diligence when comparing providers.
Do not forget to carefully examine the tender documents. Look at things like dilutive clauses (warrants or performance fees are expensive), financial clauses (anticipate if your company can meet them), amortization structure (consider if it makes sense for your company), and reporting/ commitment (how much effort you have to put in).
I did not forget it: Flexibility is key.. How flexible is your financing partner? Alternative advantages, such as continued underwriting, may indicate that your financing partner is willing to support future growth opportunities beyond your current loan.
