Startup business loans: Options when funding with debt 

Ways to finance a startup with loans and debt

Debt financing

Debt financing that is non-dilutive have for a long time been preserved for the latest stages of a startup and scaleup journey. But due to new innovative ways of calculating risk it’s now also accessible for tech companies in earlier stages. At Gilion we do this through our Growth Loan.

Bank loans

This is the most traditional option for business loans. Banks typically offer both secured and unsecured loans. Secured loans are backed by collateral, such as property or equipment. Unsecured loans are not backed by collateral and may have a higher interest rate.

Government loans

The Small Business Administration (SBA) offers several loan programs for small businesses, including tech startups. SBA loans typically have lower interest rates and longer repayment terms than other business loans.

Venture debt

Venture debt is a type of financing that is typically used by startups and early-stage companies. It is a form of debt financing that is provided by venture capitalists. The main advantage of venture debt is that it does not require equity dilution. Equity dilution occurs when a company issues new shares of stock, which can dilute the ownership stake of existing shareholders. Usually the funding stages of venture capital is Seed Funding, Series A, Series B and Series C.

Angel investors

Angel investors are individuals who invest in startups. Like venture capitalists, they typically invest in companies with high growth potential. However, angel investors typically invest their own personal funds, rather than money from a VC firm. The downside here is that almost all angel investors require equity which does not make it into a real debt financing.

Advantages of financing your startup with debt instead of equity

For many startup businesses, the question of how to finance their operations is a key concern. debt financing and equity financing are two of the most common options, but each has its own advantages and disadvantages. Debt financing, which involves taking out loans or lines of credit, can provide a business with the capital it needs without giving up any ownership stake. Equity financing, on the other hand, involves selling partial ownership of the company in exchange for funding. 

Debt financing offers a number of advantages. Because you're not giving up any ownership stake in your company, you retain complete control over decision-making. In addition, debt payments are typically fixed, which can help you better predict and manage your cash flow. On the downside, debt financing can be difficult to obtain if your business is new or has a limited track record. Usually regular banks are limited to lend to startups and scaleups with short track records. At Gilion we calculate risk in a different way than any bank with our Growth Loan which is a new way for tech companies to raise debt.

There are some potential downsides to equity financing compared to debt financing. For example, giving up partial ownership of your company can dilute your control over decision-making. In addition, if your business is successful, equity investors will expect to share in the profits.

There is no easy answer when it comes to choosing between debt and equity financing for your startup business. The best approach will likely depend on a number of factors, including the amount of capital you need, the stage of your business, and your personal preferences. We see our debt financing as a great complement på the VC model where you grow your company with a mix of both equity and debt, like a hybrid engine for your business.

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Importance of building a great capital mix

When it comes to financing a startup, there are a number of options available to entrepreneurs. One option is to seek equity financing, which involves selling a stake in the company in exchange for funding. However, equity financing can be difficult to obtain, and it can also dilute the ownership of the company. Another option is to seek debt financing, which involves taking out loans from investors. 

The best option for many startups is a combination of equity and debt financing. This approach can provide the company with the funding it needs while still allowing the founders to maintain majority ownership. In addition, the interest payments on debt financing can often be offset by the profits generated by the company. Ultimately, combining equity and debt when financing a startup can be a great way to maximize funding while minimizing dilution.

Gilion offers Growth Loans to tech companies which is a new way for tech companies to raise debt. This can be a great option for companies that are growing quickly and generating significant revenues. The first real complement to venture capital.

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When should a startup or scaleup consider debt financing

Debt financing is a key consideration for any business at any stage of growth, but it's especially important for scale-ups. This type of financing can provide the capital you need to expand your operations, hire new employees, and take your business to the next level. If you're thinking about borrowing money to fuel your growth, here are four things to keep in mind:

Your debt-to-equity ratio

The debt-to-equity ratio is a key measure that lenders use to determine how risky a loan is. It compares the amount of debt you have to the amount of equity you have in your business. A high ratio means that you're more vulnerable to defaulting on your loan, so be sure you can afford to make monthly payments even if your sales decline.

The terms of the loan

When you borrow money, you'll need to agree to certain terms and conditions with the lender. These may include repayment terms (e.g., how much Principal + Interest must be repaid each month), as well as penalties for late payments or defaulting on the loan altogether.

How it will impact your cash flow

One key thing to remember about debt financing is that it doesn't generate immediate revenue like equity does - you'll need to pay back both Principal and Interest over time no matter how well your company is performing. Be sure you can account for these costs in your budget and allocate enough cash flow each month to cover them comfortably.

There are a lot of different lenders who offer loans specifically for tech companies and startups. Don’t be afraid to reach out and ask questions – we are more than happy to answer any questions you have and advise you through the process of helping you with debt financing.

Gilion is a non-traditional bank that does not offer the same financial services as accounts, investment tools, credit cards, etc. The one product we do share with traditional banks is lending money.

What further distinguishes us from banks and other financial institutions is how we model the performance of a company. Instead of looking at historical aggregated accounting metrics, we make risk assessments based on highly granular business metrics and we don’t just look at the history - we try to predict the future outcomes. This allows us to identify strong businesses earlier than what would be possible by looking at annual reports.

Becoming the global source of truth for tech growth forecasts is our ambition, and to make funding flow in an democratized and unbiased way.