Fundraising Decision Tree
Companies often look for external sources of capital in order to maintain operations and invest in the company’s future growth. External capital typically comes in three forms: bank debt, equity financing, and alternative financing (e.g. venture debt or revenue-based financing). Deciding which type of financing is an important decision that can affect the cost of capital, growth projections, and overall success of the company later down the road.
To help guide you through which financing structure may be best fit for you and your company, use Flow Capital’s Fundraising Decision Tree.
For companies that have strong management teams, have room to grow, and are confident in their ability to grow quickly, Flow Capital’s alternative financing structures offer fast, flexible, and minimally-dilutive growth capital.
Alternative Financing: Venture Debt
Similar to a traditional bank loan, venture debt involves a fixed term loan with fixed monthly interest payments. Venture debt loans can be used for a variety of things, including extending cash runway, bridging to an equity round, funding large capital expenditures, or simply for growth capital. The difference between traditional bank loans and venture debt is venture debt involves less strict covenants, it does not require personal guarantees, and loan amounts tend to be higher (e.g. Flow Capital provides venture debt loans ranging from $2-6 million). This is also a great option for companies who have already gone through equity financing and are looking to top-up their last round.
Click here for more information about venture debt.
Alternative Financing: Revenue-Based Financing
For companies experiencing or anticipating rapid growth within the next 3-5 years, revenue-based financing is a great option for growth capital. Under an RBF structure, monthly payments are flexible as they are based on a percentage of the company’s monthly revenue. Companies using revenue-based financing should have strong cash flows to make these monthly payments. While most RBF lenders assign a fixed term to the loan, Flow Capital’s unique RBF structure leaves timing up to the founder. The founder has the ability to choose at what point the company is ready to buy out the investment.
Click here for more information about revenue-based financing.
When to Raise Bank Debt
Companies that have already reached sustainable profits should apply for a bank loan. This is the best option for financing for companies at this stage because of their ability to service the loan. Bank debt is best suited for founders who are comfortable giving personal guarantees and strict covenants.
The company should feel comfortable making interest payments, meaning the total amount repaid exceeds the initial sum. These payments must be made regardless of business revenue, which for small or early-stage businesses, may be more dangerous due to their volatile nature.
When to Raise Equity
Early-stage companies looking for hyper-growth (e.g. 10X+) should look to equity financing. For early-stage companies looking for 10X growth with guidance to build their team should look to equity financing. Founders should be comfortable with significant equity dilution and giving up control of their business through board seats.
If taking on debt is not financially viable option, you should consider raising equity. The primary benefit of raising equity is there is no requirement to repay. Instead, the cost of capital comes is associated with selling shares of company stock. The disadvantage of this is each shareholder holds a small piece of the company, so ownership is diluted. Therefore, equity capital is more expensive than debt capital.