Those are the facts. Obvious: Startups are increasingly difficult to secure funding, and even unicorns appear cornered, with many lacking both capital and a clear exit.
But equity rounds aren’t the only way a company can raise money—alternative and other untapped financing options are often overlooked. When you are focused on growth and can see a clear ROI from the capital you have deployed, taking on debt can be the right solution.
Not all capital providers are equal, so it’s not just about finding financing. securing Capital. It’s all about finding the right source of funding that matches your business and 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. Don’t seek funding until you have a clear plan for how you will use it. For example, do you need capital for growth or day-to-day operations? The answer should affect not only the amount of capital you need, but also the type of funding partner you need.
Start with a realistic plan and make sure it fits your financial structure:
- Match the repayment terms to your use of the loan.
- Balancing working capital needs with growth capital needs.
While it’s possible to hope for a one-and-done financing process that puts the next round down the line, this can be more expensive than you think in the long run.
Your repayment period must be long enough to be able to deploy the capital. And See returns. If not, you can make loan payments with the principal.
For example, say you get funding to enter a new market. You plan to expand your sales force to support the move and develop the cash flow needed to pay off the loan. Here’s the problem, the new hire takes months to develop.
If there isn’t enough delta when you start growing and paying off, you’ll pay off the loan before the new seller can generate income for you to see ROI on the amount you borrowed.
Another thing to consider: If you’re financing operations rather than growth, working capital requirements may limit the amount you can deploy.
Let’s say you fund your advertising spend and plan to deploy $200,000 over the next four months. But payments on the MCA loan you take out to finance that cost will eat into your income, and the loan is limited to a minimum cash commitment of $100,000. The result? You’ve got $200,000 in financing, but you can only deploy half of it.
When your $100,000 in funding is placed in a cash account, the loan will only be used to leverage half of it, meaning you may not meet your growth target. Worse, since you can only deploy half of the loan, your cost of capital is double what you had planned.
Is this the right amount for me at this time?
The second consideration is balancing how much capital you need with your near-term goals versus what you can reasonably expect. If the funding you can get isn’t enough to move the needle, it may not be worth the effort required.
