How business loans work for startups
The most common option is to go through a bank or other financial institution. However, there are also many online lenders that cater to tech companies and startups.The best option for a business loan depends on the specific needs of the tech company or startup.
For example, some companies may need a large amount of money quickly, while others may have a longer time frame to repay the loan.A startup's early investors are typically those who provide the company with money, expertise and contacts to get it off the ground.As a startup begins to grow, it may need additional funding in order to continue scaling up. In some cases, this can come from debt financing.
Debt financing can be a great option for a scale-up when there is strong evidence of future profitability and when the terms of the debt are favorable. However, it's important to weigh all of the pros and cons before taking on any type of debt financing.
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.
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.
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.
