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How to Not Get Funded

In speaking recently with Brian Parks, founder of Bigfoot Capital, we touched on the primary reasons that SaaS financing deals ultimately fall through – or fail to even get off the ground in the first place.

Bigfoot receives hundreds of inquiries a year, evaluates ~40% of those inquiries, and ultimately finances ~10% (25% of what they spend time evaluating). Throughout their process, it’s paramount for them to run as efficiently as possible and not string Founders along. In order to do so, they rely on Founders to engage with them, providing data and time to talk through their request for capital and the business holistically.

Even though many founders claim to need growth capital, Bigfoot is at times left standing there with open arms with the founder nowhere to be seen. Without true engagement, the process stalls out, creating a mutually frustrating outcome.

It seems counter-intuitive, perhaps even unlikely, that founders would go radio-silent on a partner who could provide them with much-needed capital and ongoing support, but it happens consistently.

So, why do so many founders ghost?

In our conversation, Brian quickly summarized what he perceives as the primary reasons as to why founders don’t follow through on the funding process, which we’ve summarized below. We’ve also included suggestions for founders/executives to get ahead of these hurdles, so that their own funding process isn’t delayed when it matters most: at the time when capital is needed to sustainably grow your business.

Reason 1: Lack of commitment

Brian sees a lot of Founders come through who lack commitment to truly investing in the fundraising process. For success, alignment of effort between the founder and the potential financing partner is really important. By no means should this be a harrowing experience, but it does take attention, communication and collaboration to succeed, all of which also matter for relationship building and getting the partnership off on the right footing.

Proposed Solution:

Regardless of the type of funding they are pursuing, founders need to mentally and logistically dedicate time to their fundraising processes. “Fundraising is a full time job” is an adage often attributed to raising from VCs, and it ought to apply, at least in part, to the process of raising non-dilutive capital as well. In other words: clear time on your calendar and make sure your team or co-founder can handle the day-to-day of the business for 2-3 days a week so that you’re able to focus solely on the fundraise during those times. 

Reason 2: Coming Unprepared

Bigfoot really tries to communicate and streamline their process and requirements as clearly as possible to minimize any surprises. If companies have their operations in order, it’s pretty straightforward. If not, it’s a lot more manual with more back and forth and confusion/pain.

Proposed Solution: 

Make sure you have your data, story and documentation in order before you begin your investor conversations. A helpful post on this topic can be found here if you need to learn more. Brian recommends utilizing tools like ProfitWell or SaaSOptics to track/share metrics and having at least outsourced accounting/finance support in place. Bigfoot has built SaaSScore.co on top of ProfitWell’s Metrics API to streamline the data acquisition process and provide Founders with an indication of their SaaS health and financing that may be able to access from Bigfoota. Check it out! See in section 4 how this puts you in a position to WOW any potential capital partner, have them lean in and drive a successful financing. Ideally, you are the most buttoned up company they have ever looked at. That’s a good goal to set for yourself and your team from the get go (and applies to any form of financing throughout the life of your company). Being fully prepared across all facets of your business makes every subsequent financing that much easier (and enjoyable). 

3. Fear

Raising money is always an unknown endeavor, whether or not you’ve done it before. If you haven’t done it, it’s fear of the unknown, fear of failure, fear of impending judgement and pain to be inflicted upon you. If you have done it, many of those fears still exist along with any battle scars you still carry from previous fundraising experience. There’s also the psychological fear of debt. What if I can’t pay them back? Can/will they take my company? How will other potential investors view me/my company having taken this money? It’s our job to cut through all of this and deliver comfort and certainty as a partner.

Proposed Solution:

This is unique for each person, so it’s a bit tougher to provide blanket advice. However, remember that you already have a business, you know where you’re headed, and with the right capital partner you’ll be able to simply be even more successful. Any investor who works with you wants you to succeed as well (test them on that, get references) – they’ll be right there, literally supporting you and cheering you on, so don’t view it as a daunting task… instead, perhaps it’s helpful to view the fundraising process as simply finding the partner with whom you’d like to succeed.

4. Value Perception Mismatch

When there is a material mismatch between the perceived investment that you have to put in up front and the resulting value you may receive by having done so, that can foul things up. If you can’t clearly determine the value you can create (and retain) from the capital you’re seeking, you may need to pause and do some thinking. Also, have the potential capital partner help you determine the value (do some collaborative modeling). Take the time to build a relationship with the lender.

Brian mentioned he recently received a 10-page beast of a diligence request from a new capital partner for Bigfoot, and he simply has to satisfy it to get their $ and grow Bigfoot. He and his team cranked it out in four days with focus and collaboration. View this as your opportunity to shine and differentiate. Brian’s proud of the way they have built Bigfoot, so this is an opportunity to expose new parties to how they operate.

How did they do it? They had their sh&t together from the previous three years as they were building their business, with an eye to the future. Founders need to realize that you just have to put in the work (and should do so beginning day 1) and the value will come from doing so.

Proposed Solution:

This is related to both #1 and #2 above, yet we’ve decided to parse it out as it’s focused more on the expectations than it is on the actual documentation and diligence process. Simply remember that someone is going to be cutting you a sizable check. Would you give a stranger $10,000 without asking questions and receiving some assurances from them?  How about $100,000 or $1M?  If you put yourself in the shoes of the investor, you’ll understand why they are requiring certain elements within their diligence process, and as a result, you’ll be a better partner for them as well — all of which will likely result in a better working relationship long term.

If you avoid the hurdles above it certainly doesn’t guarantee that you’ll get funded, but if you go bumping into these hurdles one by one, fumbling through the process because you weren’t prepared – it’s going to be damn hard to get that term sheet in your hands. 

Collaboratively authored by Brian Parks and Thomas Rush

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The Bootstrapp Guide to Startup Funding Options

Industry Background

Venture capital isn’t a new phenomenon by any means; in fact, it has been around for a very long time, but in the last 100 years, it’s relevance has boomed.

One of the key moments in history was J.P. Morgan acquiring Carnegie Steel Company in 1901 to form U.S. Steel. This deal marked the advent of modern-day private equity.

Another moment that ignited the industry occurred in 1957 when Digital Equipment Corporation (DEC) received a $70,000 investment from American Research and Development Corporation (ARDC). At the time of the IPO, ARDC’s stake in DEC became worth over $38 Million, just your average 500x multiple. This deal was one of the first major venture capital investments. Oddly enough, that model has hardly evolved, until recently.

Over the past few years, the pace of evolution has quickened. There are virtually limitless amounts of investment models (SAFE, SEAL, KISS, Insert another confusing acronym here, RBF, and more). However, because the models are still quite young, there isn’t much publicly available data on them, let alone simple, clearly defined definitions of each. 

This guide acts as an attempt to simplify the conversation. We’re attempting to dive into the world of startup finance, breaking each financial instrument down into its component parts to understand its mechanics better. But to get there, we have to start from the top, so let’s consider that detailed breakdown as “out-of-scope” for now. 

This guide is all about simplifying the world of startup financing- presenting all the information in simple language, not lawyer language. So, let’s start with the basics.

The Current World of Startup Finance

If you head over to google and search “startup finance,” you’ll stumble into tons of articles on Venture Capital, Angel Investors, and loans. And rightfully so, those three options have dominated the startup finance game since the ‘60s and beyond. 

Venture Capital

Venture capital is a form of private equity where venture capital (VC) firms and funds (typically) invest in early-stage, high growth potential startups for an equity stake. VC, generally speaking, has been extremely successful and has funded big-name companies from SpaceX to Airbnb. Still, obviously not all companies turn out to be unicorns like Airbnb or Peloton. 

Because of this, venture capital firms tend to look for unicorns,  privately held startups valued at over $1 billion, to create their success because 25-30% of VC backed startups fail which results in VC firms losing out on the money they had invested.

Angel Investors

Beyond VC firms, startups often look to angel investors, individuals who provide capital for a business start-up, usually in exchange for convertible debt or equity. The show Shark Tank has drawn a lot of attention to angel investors because all of the “sharks” are actually angels. 

The main difference between angel investors and venture capitalists is that angels tend to be very wealthy individuals who fund the venture through their personal assets while venture capitalists are employed by venture capital firms to essentially invest other people’s money.

Until recently, if you wanted to fund your company’s growth, you had to be willing to part with some equity, but different fundraising techniques like Revenue Based Financing (RBF) took off in the 2010s.

Once again, there is no single answer to the question, “What is the best way to fund my startup?” No method is blatantly superior to the other. Still, there are advantages and disadvantages of every option, and this is a guide to identifying the strengths and weaknesses of multiple options.


For a lot of founders, raising VC money isn’t a great fit. It means giving up valuable equity and potentially giving up control in the direction of their company depending on how large a share the investors take. That’s not to say everyone should avoid venture capital, but there are a number of other options that founders should be aware of that may be a better fit for them. Below, we’ll break down the most common options for obtaining financing, as well as their pros and cons. 

SBA Loan

For an SBA Loan, the Small Business Association guarantees part of the loan reducing the risk for the lender. These types of loans are very affordable, but the requirements are strict, and receiving funding can take longer than a traditional loan.

  • Pros: 
    • SBA Loans are lower cost
    • Favorable repayment terms
    • Low monthly payments
    • Available for many uses
    • Less collateral required
  • Cons:
    • The low cost of an SBA loan comes with strict requirements, and due to the increased scrutiny, the approval process can be longer than traditional loans.
    • Good credit is often required
    • Numerous SBA programs exist which can be confusing
    • Personal guarantee often required

Business Line of Credit

A business line of credit is very similar to a business credit card. You can use it whenever it’s needed as long as you don’t exceed the predetermined limit. However, with a business line of credit, you can also withdraw cash. There are two kinds of business lines of credit; revolving and non-revolving. With revolving credit, you can use the funds, pay them back, and your credit limit doesn’t expire or close – allowing you to leverage that same line of credit again in the future. With non-revolving credit, you can also borrow the funds up to the limit of the credit line; however, once you’ve returned the capital to the lender, the credit line will close.

  • Pros: 
    • Build business credit
    • Smooth cash flow during leaner months
    • Interest is only charged for capital you use
    • Flexible loan product
  • Cons:
    • Difficult to qualify
    • Can be expensive
    • Limits can be low
    • Application is time-consuming
    • Difficult to choose the best lender

Equipment Financing

Equipment financing helps you buy equipment for your business. You can use it to purchase new and used machinery, cars, or any other equipment your business may need.

  • Pros: 
    • Low APR
    • Predictable monthly payments
    • Builds business credit
    • Equipment serves as collateral
  • Cons:
    • Can require a high down payment
    • Good credit is needed to obtain reasonable terms
    • Only available for equipment purchases

Invoice Factoring

Invoice financing allows businesses to borrow money against outstanding invoices or sell those invoices at a discount. It works by providing a cash advance based on a percentage of the unpaid or outstanding invoices. Generally, you can receive between 50-90% of the value of outstanding invoices depending on the risk that those invoices will ultimately be paid. 

  • Pros: 
    • Fast approval without much paperwork
    • Can mitigate cash flow emergencies
    • Transparent and easy to understand pricing
    • Personal credit is not a major factor
  • Cons:
    • Relatively high rates/fees
    • Need invoices as proof/collateral
    • Mostly unavailable for business to consumer businesses

Personal Loan for Business

A personal loan is money borrowed from a bank, credit union, or online lender that can be used for any number of purposes. As long as the lender doesn’t restrict it, you can use a personal loan for your business. Most personal loans are unsecured, so they don’t require any collateral.

  • Pros: 
    • If your business is just starting out, it may be easier to get a personal loan than a small business loan
    • Personal loans tend to have lower APR’s than credit cards
    • A personal loan is flexible and can be spent on anything from office supplies to credit card bills 
  • Cons:
    • No tax credits, as you might otherwise receive if you were to take out a business loan
    • If the loan is secured, assets like your house may be used as collateral
    • Personal loans are usually smaller than business loans
    • Generally higher rates than a business loan

Merchant Cash Advance

Merchant cash advances (MCAs) can be a riskier form of financing. Some carry APRs in the triple digits, and their daily repayment schedule can lead to a debt trap where it is nearly impossible to repay without refinancing. A merchant cash advance provider gives you an upfront sum of cash and takes fixed debits from your bank account on a daily or weekly basis. Some merchant cash advances are structured similarly to a royalty payment, except they are paid back by the lender receiving a portion of credit card transactions instead of overall revenue.

  • Pros: 
    • Merchant Cash Advances are quick with no heavy paperwork
    • MCAs are unsecured, so you don’t need any personal or business collateral
  • Cons:
    • Much higher fees and interest rates than a revenue-based financing deal 
    • No benefit to repaying early

Business Credit Card

Business credit cards can be a useful tool for small business owners. They’re a convenient way to increase your company’s purchasing power. Business credit cards essentially have two categories. Cards with low APRs and cards that earn business owners’ rewards. If you plan to carry a balance, a card with a low APR is probably better. If not, you might want to maximize your rewards. 

  • Pros: 
    • Some cards have lucrative bonuses
    • Flexible 
    • Convenient
    • Separate your business and personal expenses
    • Build business credit
  • Cons:
    • Business cards tend to offer fewer protections and come with higher rates and fees
    • Higher rates and fees than an SBA loan
    • Business credit cards provide less protection than personal cards

Purchase Order Financing

Purchase order financing is very similar to invoice factoring except that instead of selling receivables invoices, the small business will sell their purchase orders for inventory or a specific service. This means the business doesn’t need to have delivered their service yet. PO financing works best for companies that offer a tangible product since they can sell the purchase order to receive the capital needed to provide the product or service. 

  • Pros: 
    • Don’t have to turn down business due to working capital constraints
    • May be able to qualify with poor credit score
    • New or small companies that don’t qualify for a traditional loan may still be able to access purchase order financing
    • Not a loan so no monthly payments
    • No equity is lost
  • Cons:
    • Not usually fast
    • Financing costs can be on the high side
    • If the client who placed the order has poor credit your business may have a hard time qualifying
    • Your customer will typically have to pay the financing company directly

Venture Debt

Venture debt refers to a variety of debt financing products offered to early and growth-stage VC backed companies. It’s typically structured as a term loan that is a percentage of what was raised during the last seed round. Taking on debt allows founders to save dilution for a future round of financing. Typically, the loan is around 30% of the last round. If your startup raised $10M in a Series A round, you would probably be able to borrow around $3M.

  • Pros: 
    • Preserves equity
    • Useful as an additional cushion on top of equity financing
    • Provides runway in between financing rounds 
  • Cons:
    • Debt needs to be repaid
    • If the company defaults on payments the venture debt managers could force the company to be sold or be liquidated
    • Without backing from a VC firm, venture debt is near impossible to find

Grant

Some businesses may qualify for grants from a variety of different organizations. Federal grants are only offered to nonprofits, educational institutions, and state and local governments, but sometimes nonprofits or state and local governments offer grants directly to small businesses.

  • Pros: 
    • No debt
    • No loss of equity
    • Veterans, young entrepreneurs, women, and minority business owners may qualify for financing and other resources
  • Cons:
    • Not available for most businesses
    • Application process can be long
    • Often a competitive process

Crowdfunding

Crowdfunding for small businesses is a fairly new option. It wasn’t legalized until 2016, and companies are allowed to raise $1.07M every year through regulation crowdfunding. There is also Regulation A+ funding, which allows companies to raise up to $50M each year, but launching is significantly more expensive and time-consuming.

  • Pros: 
    • Available for startups
    • No need for collateral
    • Investors can advise your company
    • Can receive a large sum of money
    • Ability to test if there is a market for your business
  • Cons:
    • Unlike VC funding, investors from crowdfunding are unlikely to add anything besides money so you might be missing out on connections or experience
    • Takes a lot of preparation and effort to pitch investors
    • Most crowdfunding platforms charge fees
    • Can take some time to get the cash
    • Giving up equity

Equity Financing

Equity financing is the process in which companies sell equity in their company to investors to raise capital. Usually, these investments come from angel investors and venture capital firms.

  • Pros: 
    • Available for startups
    • Investors can advise your company
    • Can receive a large sum of money
    • No repayment necessary
  • Cons:
    • Loss of equity
    • Not many small businesses will be considered
    • Difficult to receive funding

Revenue Based Financing/Royalty Financing/Shared Earnings Agreement

Revenue-based financing is an alternative financing option for small businesses in which they receive funding in exchange for a percentage of future revenue. Lenders charge a fixed amount, and payments are typically capped between 1.35x to 3x the amount borrowed. The biggest benefit is how flexible these loans are since, during slow months, the business will pay back less than they do during hot months. We even have a calculator on our website you can use to find out what your payments look like with this type of financing.

  • Pros: 
    • No loss of equity
    • Pay less during months with lower revenue
    • No personal guarantees
  • Cons:
    • You’ll pay more long term
    • You need revenue to qualify
    • Payments can place strain on your operating capital

Peer to Peer Lending

Peer-to-peer lending enables individuals to get loans from other individuals and cuts out the middleman. For qualified applicants, the rates are often lower than a bank loan, but for less qualified applicants, the rates can be higher.  

  • Pros: 
    • More accessible than a business loan 
    • Fast and easy process
  • Cons:
    • Low credit applicants may end up with a higher rate 
    • Not well regulated 

Working Capital Loan

Working capital loans are a specialized type of loan designed to help businesses meet their day to day operating costs. These loans are typically short term and designed to cover urgent cash flow issues.

  • Pros: 
    • Cash on hand to deal with any problems
    • Non-dilutive
    • May not need collateral
    • Borrow and repay quickly
  • Cons:
    • Short term
    • Needs to be repaid and might have a high-interest rate due to the short repayment period

SAFE

SAFE notes, or “Simple Agreement for Future Equity,” were invented by Y Combinator with the intention of creating an alternative to convertible notes. They function in a similar fashion, but unlike a convertible note, there is no debt component. 

  • Pros: 
    • Less complicated than a traditional equity round
    • No interest paid on the principal amount
  • Cons:
    • Sophisticated investors might object to using a SAFE
    • A convertible note that is too large may negatively impact the next round of financing
    • Companies must be incorporated to offer SAFE notes
    • Equity is diluted when SAFE is triggered

Convertible Note

A convertible note is a type of debt that converts into equity when certain actions take place like a new round of fundraising or an acquisition. If you want to take a look at what a convertible note term sheet looks like, Indie.VC uses a modified convertible note for all of their investments and publishes their term sheet here.

  • Pros: 
    • Less complicated than traditional equity round
    • Companies can delay placing a value on themselves
  • Cons:
    • Some investors are reluctant to use convertible notes since they may be forced to convert their debt to shares with unfavorable terms
    • A convertible note that is too large may negatively impact the next round of financing
    • Equity is diluted when the note converts

SEAL

SEAL stands for Shared Earnings Agreement, and it’s typically used as a substitute for convertibles and straight equity deals. SEAL investors get an agreed-upon percentage of net income up until a certain cap. In a priced funding round, a SEAL operates in a similar way to a SAFE or convertible note. You can take a look at an example term sheet here.

  • Pros: 
    • Simple structure
    • Equity conversion basis is reduced as payments are made
  • Cons:
    • There is still a base amount of equity given up even if the earning cap is met
    • Equity is diluted when SEAL is converted to equity 

The world of startup financing is incredibly murky. When trying to find financing, founders typically get a random recommendation from a friend/lawyer/banker who is under-informed, or they roll up their sleeves and start researching the entire space from scratch. Then, after finding a financier, they’re left to negotiate the terms blindly and without context. Bootstrapp is here to help level the playing field and eliminate the work of finding non-dilutive capital, saving founders and their employees valuable time and equity.

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The Breakdown: Types of Small Business Funding

When looking for funding for your small business or startup there are a variety of different options each with different pros and cons. If one of your concerns is giving up equity, there are options for non-dilutive growth capital. The sheer number of financing options can be difficult to navigate so we’ve broken down the most common ones here. 

SBA Loan

For an SBA Loan, the Small Business Association guarantees part of the loan reducing the risk for the lender. These types of loans are very affordable, but the requirements are strict and receiving funding can take longer than a traditional loan.

  • Pros: 
    • SBA Loans are lower cost
    • Favorable repayment terms
    • Low monthly payments
    • Available for many uses
    • Less collateral required
  • Cons:
    • The low cost of an SBA loan comes with strict requirements and due to the increased scrutiny, the approval process can be longer than traditional loans.
    • Good credit is often required
    • Numerous SBA programs exist which can can be confusing
    • Personal guarantee often required

Business Line of Credit

A business line of credit is very similar to a business credit card. You can use it whenever it’s needed as long as you don’t exceed the predetermined limit. However, with a business line of credit, you can also withdraw cash. There are two kinds of business lines of credit; revolving and non-revolving. With revolving credit, you can use the funds, pay them back and your credit limit doesn’t expire or close – allowing you to leverage that same line of credit again in the future. With non-revolving credit, you can also borrow the funds up to the limit of the credit line, however once you’ve returned the capital to the lender, the credit line will close.

  • Pros: 
    • Build business credit
    • Smooth cash flow during leaner months
    • Interest is only charged for capital you use
    • Flexible loan product
  • Cons:
    • Difficult to qualify
    • Can be expensive
    • Limits can be low
    • Application is time-consuming
    • Difficult to choose the best lender

Equipment Financing

Equipment financing helps you buy equipment for your business. You can use it to purchase new and used machinery, cars, or any other equipment your business may need.

  • Pros: 
    • Low APR
    • Predictable monthly payments
    • Builds business credit
    • Equipment serves as collateral
  • Cons:
    • Can require a high down payment
    • Good credit is needed to obtain reasonable terms
    • Only available for equipment purchases

Invoice Financing

Invoice financing allows businesses to borrow money against outstanding invoices, or to sell those invoices at a discount. It works by providing a cash advance based on a percentage of the unpaid or outstanding invoices. Generally, you can receive between 50-90% of the value of outstanding invoices depending on the risk that those invoices will ultimately be paid. 

  • Pros: 
    • Fast approval without much paperwork
    • Can mitigate cash flow emergencies
    • Transparent and easy to understand pricing
    • Personal credit is not a major factor
  • Cons:
    • Relatively high rates/fees
    • Need invoices as proof/collateral
    • Mostly unavailable for business to consumer businesses

Personal Loan for Business

A personal loan is money borrowed from a bank, credit union or online lender that can be used for any number of purposes. As long as the lender doesn’t restrict it, you can use a personal loan for your business. Most personal loans are unsecured so they don’t require any collateral.

  • Pros: 
    • If your business is just starting out, it may be easier to get a personal loan than a small business loan
    • Personal loans tend to have lower APR’s than credit cards
    • A personal loan is flexible and can be spent on anything from office supplies to credit card bills 
  • Cons:
    • No tax credits, as you might otherwise receive if you were to take out a business loan
    • If the loan is secured, assets like your house may be used as collateral
    • Personal loans are usually smaller than business loans
    • Generally higher rates than a business loan

Merchant Cash Advance

Merchant cash advances (MCAs) can be a riskier form of financing. Some carry APRs in the triple digits and their daily repayment schedule can lead to a debt trap where it is nearly impossible to repay without refinancing. A merchant cash advance provider gives you an upfront sum of cash and takes fixed debits from your bank account on a daily or weekly basis. Some merchant cash advances are structured similarly to a royalty payment except they are paid back by the lender receiving a portion of credit card transactions instead of overall revenue.

  • Pros: 
    • Merchant Cash Advances are quick with no heavy paperwork
    • MCAs are unsecured so you don’t need any personal or business collateral
  • Cons:
    • Much higher fees and interest rates than a revenue-based financing deal 
    • No benefit to repaying early

Business Credit Card

Business credit cards can be a useful tool for small business owners. They’re a convenient way to increase your company’s purchasing power. Business credit cards essentially have two categories. Cards with low APRs and cards that earn business owners rewards. If you plan to carry a balance, a card with a low APR is probably better. If not you might want to maximize your rewards. 

  • Pros: 
    • Some cards have lucrative bonuses
    • Flexible 
    • Convenient
    • Separate your business and personal expenses
    • Build business credit
  • Cons:
    • Business cards tend to offer fewer protections and come with higher rates and fees
    • Higher rates and fees than an SBA loan
    • Business credit cards provide less protection than personal cards

Purchase Order Financing

Purchase order financing is very similar to invoice factoring except that instead of selling receivables invoices, the small business will sell their purchase orders for inventory or a specific service. This means the business doesn’t need to have delivered their service yet. This works best for companies that deliver a tangible product since the business can sell the purchase order to receive the capital needed to deliver the product or service. 

  • Pros: 
    • Don’t have to turn down business due to working capital constraints
    • May be able to qualify with poor credit score
    • New or small companies that don’t qualify for a traditional loan may still be able to access purchase order financing
    • Not a loan so no monthly payments
    • No equity is lost
  • Cons:
    • Not usually fast
    • Financing costs can be on the high side
    • If the client who placed the order has poor credit your business may have a hard time qualifying
    • Your customer will typically have to pay the financing company directly

Venture Debt

Venture debt refers to a variety of debt financing products that are offered to early and growth-stage VC backed companies. It’s typically structured as a term loan that is a percentage of what was raised during the last seed round. Taking on debt allows founders to save dilution for a future round of financing. Typically, the loan is around 30% of the last round. If your startup raised $10M in a Series A round, you would probably be able to borrow around $3M.

  • Pros: 
    • Preserves equity
    • Useful as an additional cushion on top of equity financing
    • Provides runway in between financing rounds 
  • Cons:
    • Debt needs to be repaid
    • If the company defaults on payments the venture debt managers could force the company to be sold or be liquidated
    • Without backing from a VC firm venture debt is near impossible to find

Grant

Some businesses may qualify for grants from a variety of different organizations. Federal grants are only offered to nonprofits, educational institutions, and state and local governments but sometimes nonprofits or state and local governments offer grants directly to small businesses.

  • Pros: 
    • No debt
    • No loss of equity
    • Veterans, young entrepreneurs, women and minority business owners may be able to qualify for financing and other resources
  • Cons:
    • Not available for most businesses
    • Application process can be long
    • Often a competitive process

Crowdfunding

Crowdfunding for small businesses is a fairly new option. It wasn’t legalized until 2016 and companies are allowed to raise $1.07M every year through regulation crowdfunding. There is also Regulation A+ funding which allows companies to raise up to $50M each year but launching is significantly more expensive and time-consuming.

  • Pros: 
    • Available for startups
    • No need for collateral
    • Investors can advise your company
    • Can receive a large sum of money
    • Ability to test if there is a market for your business
  • Cons:
    • Unlike VC funding, investors from crowdfunding are unlikely to add anything besides money so you might be missing out on connections or experience
    • Takes a lot of preparation and effort to pitch investors
    • Most crowdfunding platforms charge fees
    • Can take some time to get the cash
    • Giving up equity

Equity Financing

Equity financing is the process in which companies sell equity in their company to investors to raise capital. Usually, these investments come from angel investors and venture capital firms.

  • Pros: 
    • Available for startups
    • Investors can advise your company
    • Can receive a large sum of money
    • No repayment necessary
  • Cons:
    • Loss of equity
    • Not many small businesses will be considered
    • Difficult to receive funding

Revenue Based Financing/Royalty Financing/Shared Earnings Agreement

Revenue-based financing is an alternative financing option for small businesses in which they receive funding in exchange for a percentage of future revenue. Lenders charge a fixed amount and payments are typically capped between 1.35x to 3x the amount borrowed. The biggest benefit is how flexible these loans are since during slow months the business will pay back less. 

  • Pros: 
    • No loss of equity
    • Pay less during months with lower revenue
    • No personal guarantees
  • Cons:
    • You’ll pay more long term
    • You need revenue to qualify
    • Payments can place strain on your operating capital

Peer to Peer Lending

Peer-to-peer lending enables individuals to get loans from other individuals and cuts out the middleman. For qualified applicants, the rates are often lower than a bank loan but for less qualified applicants the rates can be higher.  

  • Pros: 
    • More accessible than a business loan 
    • Fast and easy process
  • Cons:
    • Low credit applicants may end up with a higher rate 
    • Not well regulated 

Working Capital Loan

Working capital loans are a specialized type of loan designed to help businesses meet their day to day operating costs. These loans are typically short term and designed to cover urgent cash flow issues.

  • Pros: 
    • Cash on hand to deal with any problems
    • Non-dilutive
    • May not need collateral
    • Borrow and repay quickly
  • Cons:
    • Short term
    • Needs to be repaid and might have a high-interest rate due to the short repayment period