When growth is your goal, raising capital is top of mind. For growth stage companies, raising capital allows you to hire staff, invest in technology, and respond to the demands of the market. You might think that banks are one of the first places that entrepreneurs look for capital. Yet increasingly founders are looking for alternatives to bank debt that make more sense for their business model.
According to a report from Business.org, the average loan amount for small businesses in 2021 increased by 27% since 2020. However, banks are often cautious to offer loans to high-risk businesses. The lending process for banks can be labor intensive and the loans themselves can sometimes take weeks or longer to be approved. The good news is mature companies that have shown to be profitable have more options than they used to.
Venture Debt as an Alternative to Bank Debt
For companies at later stages looking to minimize dilution, venture debt has become one of the more popular alternatives to bank debt. Venture debt is non-dilutive, and less expensive than venture capital. Venture debt is generally reserved for companies with a clear growth strategy. For this option, investors will want to know details such as how revenue is increasing and how the money will be used to fund further growth. Your plan should also include milestones with detailed steps of how your company will reach each step.
Eastward Capital Partners’ venture debt products are similar to traditional bank debt where a company borrows capital and makes monthly payments. Unlike a traditional loan, however, Eastward’s loans typically provide a period of interest-only payments before principal balances begin to amortize. This interest only period allows the company to manage their cash balances.
The debt products offered by Eastward include Senior Debt (secured by all the assets of the company) or Senior Subordinated Debt (for example term debt which is subordinated to a receivable line).
Eastward’s loans typically include additional components such as warrants as well as the right to invest in future equity rounds.
Revenue Based Financing
Revenue Based Financing is another alternative to bank debt to fund your late stage business. This type of financing is where companies pledge a certain percentage of their gross revenues to investors as a form of investment. Once the initial investment has been paid, a predetermined amount – up to three to five times the original investment – continues to be paid.
Since this type of financing is based on your revenue, in order to qualify you must be able to show significant monthly recurring revenue (MRR). The downside is that the more revenue you earn means more you have to pay out which can negatively affect your resources to spend on other expenses.
Crowdfunding is a general term for raising money from a large group of investors. Unlike regular crowdfunding, where you offer backers products or services, equity crowdfunding involves selling shares of your company to get capital.
The U.S. Securities and Exchange Commission allows private companies to legally raise up to $5 million in a 12-month period through equity crowdfunding. There are many online crowdfunding platforms available. Depending on the platform, fees, requirements, and guidelines differ, but the process is generally faster than traditional bank loans.
Growth stage entrepreneurs have more options today when it comes to financing. Before partnering with any lender, make sure you understand how the alternative options work and what the advantages and disadvantages are. The reputation and experience of the partner should be an important part of your to determine which solution is the best for your business’ needs.
Back to Venture Debt Blog
This is not an offer to sell, or a solicitation of an offer to purchase an interest(s) in any fund managed by Eastward Capital Partners, LLC (“Eastward”). Such an offer will be made only by an Offering Memorandum, a copy of which is available to qualifying potential investors upon request. This material is not financial advice or an offer to sell any product. Eastward is a registered investment adviser. Registration does not imply a certain level of skill or training. More information about Eastward including its advisory services and fee schedule can be found in Form ADV Part 2 which is available upon request.