Understanding Debt Financing For Startups
Equity financing isn’t the only option for your startup or small business. Understand the benefits of debt financing from an expert.
Most entrepreneurs view equity financing as the best and most common form of raising money for their startup. Equity financing involves the typical pitching to investors and venture capital firms to raise money in exchange for equity in your company — the stuff you frequently see on TV and read about online. However, that’s not the only way to raise money for your company. In fact, in many cases it’s not even the smartest route to take.
We invited our friend Peter Somerville, director of investor relations at StreetShares, to tell us more about debt financing. In this quick Q&A he provides a ton of awesome insight into how debt financing can benefit your company and how StreetShares can be a tremendous vehicle to both invest and receive investments.
- What is debt financing?
Debt financing is money that you have to pay back. This can take the form of a loan, a line of credit, a credit card, or a merchant cash advance.
2. What companies are best suited for debt financing?
Lenders work with companies that can make a compelling case that they will repay their loan. This usually takes the form of either (a) past performance, a track record of consistent business revenue, or (b) future revenue in the form of government contracts, purchase orders, or accounts receivable.
3. What are some of the other options available to fund your company?
There are three major categories of funding: equity, crowdfunding, and debt funding.
Equity funding is selling part of your company to angel investors, venture capitalists, or some incubators. Most equity investors look for a company with the potential for exponential growth, so you need a compelling story about how your company is on the path to fame and fortune. If you get a funding offer, don’t forget to do your due diligence — once you accept equity funding, you’re married to the investors.
Crowdfunding is “gift-based” fundraising, on platforms like Kickstarter or Indiegogo. A successful campaign takes a huge amount of work, so plan on making PR and marketing your full-time job for the duration of the campaign. And get your unit economics right before you launch; if it costs $24 to print and ship a t-shirt to each $25 backer, you’ll have little to show for your efforts.
4. What are the advantages and disadvantages of using debt financing?
The advantages for debt funding are speed, flexibility, and access. Equity fundraising can require months of meetings and pitches, and crowdfunding campaigns typically last 30 days, but small business lenders like StreetShares can offer funding in just a day or two. Debt financing is flexible to your needs — if you’re buying a truck for your company, there are specialized solutions to fit your need. And debt funding is accessible to far more companies than equity or crowdfunding; no VC pitches or crowdfunding PR effort needed.
The disadvantages are that you have to pay back the funds, and that many small business lenders bury important details in the fine print. Compared with a personal loan, most business loans have fewer mandatory disclosures, so it’s up to the borrower to make sure they understand the true cost of the loan, and understand any hidden fees at the outset.
5. Where do you go to receive debt financing?
You might think it’s as simple as visiting your neighborhood bank. But bank regulations and red tape mean that brick-and-mortar banks will seldom lend to businesses in amounts below $250,000, and most banks require a stack of time-consuming forms you must fill out in person, with paper and pen. Many online business lenders have emerged to fill the gap with fast financing options, but reading the fine print is a must as many lenders will bury the true cost.
6. How does StreetShares fit into this picture? What sets you apart from other lenders?
StreetShares provides fair, fast, and affordable funding for small businesses. We present every funding offer transparently to the business owner, so that they understand the cost and terms. StreetShares is one of only a few lenders to sign the Small Business Borrowers’ Bill of Rights.
StreetShares recognizes the fast pace of small business. Companies need flexible funding at the speed of business opportunities, so we work closely with business owners to provide funding options in just a few days.
StreetShares also sets the standard for affordable loan funding. We have lowered our cost of capital by building a community of thousands of individual investors who are inspired to put their money to work funding hundreds of great small businesses in neighborhoods around the country.
7. How do you get started on StreetShares — as a borrower or an investor?
It’s totally free and easy to become a StreetShares member at www.streetshares.com. As a member, you can apply for business funding, or start earning great returns on your savings while supporting small business. All members get access to our community of business education resources and special offers from other members.
Companies can apply for loans and lines of credit in just a few minutes. And anyone can open an investing account with just $25 and earn 5% interest.
In addition, our StreetShares Foundation offers $10,000 in free grants every month through the Veteran Small Business Awards for veteran-owned businesses.
