5 Debt Financing Options for Pre-VC Backed Companies

September 26, 2019

For many entrepreneurs, venture capital seems to be the end-all and be-all to growing successful companies. Each series round seems to represents another feather in your cap, representing a huge influx of capital and a pool of endless opportunities. But what if you’re growing your company without venture capital funding? Luckily, there are plenty of ways to secure quality sources of debt financing.

In fact, there are great reasons behind seeking debt financing instead of venture capital. Venture capital is best for early-stage startups with unpredictable cash flow with the goal of growing at a 10X return rate. The reality is, the majority of companies don’t match this description. Many founders want to focus on growing their business at a pace that better fits their goals.

Sources of Debt Financing

1. Friends, Family, Co-Founders & Board Members

Often the first choice for young businesses, friends, family members, co-founders, and board members are often looked to for debt financing. This is structured as convertible debt, which carries a low interest rate and converts into equity at a certain point in time (typically around a series round of funding). Unfortunately, founders must be careful because you will be responsible for paying these back out of your own pocket if you are unable to raise an equity round by the specified time.

2. Bank Debt & Online Lenders

The classic source for debt financing is bank loans. Either secured or unsecured, personal or business loans, bank loans are not designed to encourage growth and are often misaligned with SaaS companies. Traditional banks or alternative online lenders are best suited if you have short term or emergency needs. If you’re in a time crunch, online lenders are much faster, but often comes with much higher interest rates.

3. Line of Credit or Factoring

MRR Line of Credit

For SaaS companies that have stable monthly revenue due to their subscription models, a better source of debt financing is a monthly recurring revenue (MRR) line of credit. Lenders love the “stickiness” of SaaS models, and typically provide working capital 3-5 times your MRR. 

A/R Factoring

If your subscription service allows customers to pay in intervals, accounts receivable factoring can help even out your cash flow and provide more predictable growth. A/R factoring provides advanced funding using your accounts receivable as collateral. 

4. Revenue-Based Financing

Another great source of debt financing is revenue-based financing. RBF is structured as loans where monthly payments are a percentage of your monthly revenue. Flow Capital offers RBF with no fixed terms, meaning it is in the founder’s control as to when they buy back the investment. As opposed to other RBF lenders with rates from 1-9%, Flow Capital offers 0.5-4% royalties and 1-3X repayment caps. 

RBF enables growing companies to grow on their own terms where monthly payments match the natural ups and downs of their business. Many consider this the most founder-friendly form of debt financing and the emerging go-to option for tech startups and other high-growth companies.

For more information, read our Founder’s Guide to Revenue-Based Financing.

5. Venture Debt

Venture debt acts as a complement or alternative to venture capital. Structured as fixed term loans, venture debt involves monthly interest payments. Businesses may opt for this form of debt financing to extend cash runway or use it as a bridge to their next round of funding. This allows the company to increase the value of their business without diluting equity.

To learn more about venture debt, read our Founder’s Guide to Venture Debt

About Flow Capital

Flow Capital provides founder-friendly growth capital for emerging and high-growth companies. Through revenue-based financing and venture debt, founders, c-level executives, and other senior leaders are able to curate the best investment structure that fits their companies’ needs.

To apply for financing, fill out our secure online form here