Is Raising Debt the Right Fit for My Business?
Building a business can be hard work. Whether you’re just getting your product into development or you’ve already found product-market fit, it takes planning to run a successful business. Making good decisions about when, how, and why you’ll be accessing funds is critical to your success.
Hiring staff, reaching your market, or producing a product can put a dent in your cash flow. However, filling the gap with debt means interest payments, credit risk, or just the liability of paying back a loan. When deciding whether to acquire debt, business owners should keep a few things in mind.
What kind of debt are you considering?
All loans aren’t built alike! Equipment loans, mortgages, lines of credit, or traditional term loans carry similar features in terms of fixed or variable interest rates, instalment payments, and repaying capital on time. However, loans will differ in the specifics of how much you’ll pay, when you’ll pay it, and how.
Some loans, such as loans with equipment or property as collateral, might come with lower interest rates. Others, like lines of credit, only require you to pay interest on the amount you use. Newer forms of debt, such as revenue-based financing (RBF) may be accessed more quickly.
All methods of financing come with their own pros and cons. Make sure to look into all of your options, and the terms associated with them, before getting started. You could find out debt isn’t a good fit, or find exactly the type of loan you’ve been looking for.
Why do you need the funds?
Starting any new business (or continuing an older one) means you need capital — but how are you planning to use it? Getting a mortgage on a property is different from covering the cost of development while you work on getting revenue streams in place.
If you have a good credit rating and are looking to purchase something tangible, like equipment, you might be better off getting a term loan. If you’re making revenue but don’t have a lot of credit history built up, you could choose something like venture debt instead.
Before you start considering your options, it’s a good idea to look at why you need debt at all. Are you trying to avoid dilution? Do you need funds quickly to capture a window in the market? Do you only need the money for a short amount of time? Your answer to these questions will determine how much (and what kind) of debt is right for you.
When do you need the funds?
Whether you’re pitching your business idea to banks, seeking out venture debt, or taking on an RBF loan between equity rounds, the ‘when’ of acquiring debt is as important as the how.
Generally, debt funding (as opposed to equity or other options, like bootstrapping) is a good idea for:
> Companies growing (or planning to grow) quickly
> Companies who only need the money for a relatively short amount of time
> Business owners who want to retain more control of the firm
> Companies expecting to generate enough revenue to cover interest payments later on
Accessing capital in the right way is crucial for your success as a firm. You might take on a term loan, team up with equity investors, back your business with venture debt, or do all of the above. The right solution will be unique to you — and good for your business as a whole.