To anyone that’s been recently fundraising, it’s obvious that startups are facing challenging hurdles in securing funding, with even unicorns finding themselves in a tight spot, grappling with insufficient capital and a murky path forward.
What most Founders don’t know is that equity rounds aren’t the only option to raise funding. Alternative and other non-dilutive financing options are often overlooked or pushed aside.
However, taking on debt can be a viable solution when your focus is on growth, and you can anticipate a clear return on investment within a projected timeframe for the capital you deploy.
Be mindful that not all options are created equal, so seeking financing goes beyond just acquiring capital; it’s about identifying the ideal source of funding that aligns with your business and its trajectory.
Here are four factors to take into account:
1. Is This Funding Suitable for Me?
Your journey should begin with a well-structured business plan. Don’t think about seeking capital until you have a clearly-defined idea of how you intend to utilize the funds.
Is the capital required for expansion or day-to-day operations? This answer should influence both the amount of capital sought and the type of funding partner you seek.
Begin with a concrete plan and ensure it lines up with the structure of your financing:
- Match repayment terms to your expected use of the debt.
- Strike a balance between short-term capital and longer-term capital requirements.
The repayment term should be sufficiently long to allow capital deployment and the realization of returns. Otherwise, you may find yourself making loan payments with the principal.
For example, say you obtain 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 is, the new hire will take months to ramp up and start generating meaningful revenue.
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 a return on investment on the borrowed funds.
Another issue to keep in mind: If you’re financing operations instead of growth, working capital requirements may reduce the amount you can deploy.
For instance, you finance your ad spending and intend to deploy $200,000 over the next four months. But payments on the MCA loan you secured to finance that spending will cut 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 stuck in a cash account, only 50% of the loan will be used to drive operations, which means you’re probably not going to meet your growth target. Even worse, because you’re only able to deploy half of the loan, your cost of capital is essentially double what you’d forecasted.
2. Is It the Appropriate Amount of Capital?
The second aspect involves balancing the capital you need for immediate goals against what you can realistically secure. If the available funding amount won’t have a significant impact, the effort required might not be worthwhile.
Conversely, in a world where unicorns exist, it’s important to remember that bigger doesn’t always mean better. You might think you need $1 million, but do you have an immediate purpose for that capital? Are you misconstruing funding as validation for your business plan?
If your strategy outlines sequential $200,000 projects, obtaining a relatively smaller loan that aligns with your current requirements can:
- Decrease payments: If you’re not deploying the capital, accepting extra financing means you’re paying for unutilized funds, resulting in wasted cash and opportunity.
- Minimize risk: Greater debt entails greater risk.
- Hone your focus: Concentrate on a smaller project, setting the stage for future success.
Entrepreneurs who typically rely on venture capital may reflexively assume they need to secure the largest amount of funding possible. However, alternative financing offers the chance to swiftly fund your projects and support future growth in smaller increments.
3. Will It Support My Growth?
Remember that building a SaaS business is a long-term endeavor, regardless of your current capital needs. When evaluating financing opportunities, assess whether your capital partner allows access to additional funding upon reaching growth milestones. An affirmative answer signifies a capital partner invested in your long-term growth objectives.
To find a partner committed to providing capital in sync with your growth, explore alternative financing options that:
- Optimize cost of capital.
- Evaluate results to facilitate further investment.
- Fund ongoing, non-dilutive growth.
To put it simply, the right financing partner collaborates with you, acting as a true partner.
This could involve advising you on matters of cash flow to determine the ideal time for additional capital investment or employing fixed payback structures that make it easier to forecast your financials. In either scenario, the partnership benefits both parties.
4. What Are the Payment Requirements?
Previously, we discussed situations in which accepting less funding than initially sought might be the right move. There are also occasions when accepting less than offered is the prudent choice, though not all financing partners support this approach.
Look for a partner that allows you to withdraw the necessary funds when you need them. You’ll discover uses for the additional capital as your business grows, but that growth might not materialize as quickly as expected.
For example, if you accept $500,000 of a $1 million offer, the right lender will keep the remaining $500,000 available for when you need it. This approach creates a virtuous cycle: you receive the appropriate funding to support current growth and only pay for what you utilize, rather than letting money sit idle in your bank account. Subsequently, your lender gradually increases your access to capital, ensuring a reserve of funds remains at your disposal.
The Choice is Up to You
While our focus has been on loans and payment terms, remember that securing capital is not solely about money—it’s also about human capital. Fundraising is a multifaceted and time-consuming process.
It’s tempting to seek a one-and-done financing process that delays the next round of fundraising. However, in the long run, this may prove costlier than anticipated. Over the years, numerous non-dilutive alternative financing options have emerged. With an array of choices available, it’s essential to conduct thorough due diligence when comparing providers.
Don’t forget to scrutinize your term sheets, examining factors such as dilutive provisions (warrants or success fees can be expensive), financial covenants (assess whether your business can meet them), payback structure (consider its suitability for your business), and reporting/engagement (determine how much effort is required).
Remember: Flexibility is key. How flexible is your funding partner? Advantages like continuous underwriting may indicate that your financing partner is willing to support future growth opportunities beyond your current loan.
Note: A version of this article originally appeared in TechCrunch.