Financing startups is always a challenge. According to the US Bureau of Labor Statistics, as many as 20% of new businesses fail within their first year. From this number, 42% fail due to a lack of financing or investors. Another 44% run out of cash. As such, the success of your business strongly depends on how strategically you manage your finances. This means that although startups have many options for funding sources — such as outside investment, venture capitalists, and crowdfunding — it’s integral to choose them strategically.
Fortunately for companies in the business-to-business (B2B) space, there are many types of financing you can consider. These tried-and-tested avenues are efficient and accessible but come with varying risks. Here are a few of them:
Direct lending involves non-bank lenders offering business loans without going through intermediaries like banks. Because it’s unregulated, lenders tend to finance higher-risk startup borrowers that banks usually would not. However, direct lending contracts may contain provisions that limit risk to the lender but put you at a disadvantage. This can include maintenance requirements, like your debt-to-equity ratio or interest coverage metrics, or restrictions from acquiring additional debt. With this arguably being the riskiest financing option to consider, consulting a financial analyst can help you assess your financial data and make strategic decisions about direct lending. By knowing how well your company is doing based on key metrics like yearly growth, return on assets, and earnings per share, you can better determine whether you meet these requirements and are suited to enter a deal with non-regulated direct lenders.
Today, a growing number of startups are turning to venture debts, raising capital by taking out three-year loans. In venture debts, bank and non-bank lenders will assess a business’s latest round of equity, their plans for the next round, and how the loan will support those plans to determine the amount they’re lending. Startups generally pursue this type of debt when they need immediate financing for specific opportunities, as it provides them with liquidity between equity funding rounds. As such, it’s important to note that venture debts are meant to follow equity — not replace it. This means they’re primarily short-term financing solutions that conveniently bolster your company’s operations.
Debt financing is very similar to traditional bank loans since you will borrow money and pay back the lender within a certain amount of time with interest. Since this type of financing is regulated, the application process can be long, and it may be risky if you’re likely to default on your payments. However, if the interest rates are low, it can be an excellent deal for you. That’s because with debt financing, you’re not diluting equity or losing ownership of your company, and you end your relationship with the lender as soon as your debt is paid back. So while some investors that lend money may have a say in business operations, debt financing saves you from obligations other than making regular payments.
Although founding a startup can be nerve-wracking, managing your finances well can set you on a path to success. With these three tried-and-tested financing options, you can ensure that you have enough funding to execute your vision.