Preparing to raise non dilutive capital

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Preparing to raise non dilutive capital


If you're in the world of startup financing, chances are you've seen and heard a lot about pitch decks, lengthy pitches, and long-term projections.

But did you know that this is only in the world of equity financing?

Yes, you read that correctly.

The process of preparing for a debt financing raise is not a game of vision and future, but a game of reality and the present.

Lets talk about it and get you ready for your debt financing raise.

What do lenders care about?

To understand what lender’s care about, we have to understand their business model.

Since these lenders are not taking equity, their ROI is limited to the terms of this agreement.

Therefore, a lender's main focus is on trying to minimize the risk of their investment in order to increase the odds of a beneficial outcome.

Because of this, what lenders value above all else is Cold. Hard. Numbers.

Numbers will tell them what they need to know in order to calculate risk and whether to proceed with an investment or not.

When you boil it all down, what a lender truly cares about is the risk you present of (not) paying back your loan.

How do lenders evaluate risk?

Most modern lenders will make you connect financial accounts to determine the risk factor associated with your business.

This is usually in the form of sales data (from a source like Stripe), accounting data (from a source like QuickBooks), and your business bank account (through a Plaid connection).

This is generally enough information for a lender to understand what makes your business tick, how capital allocation can help, and the risk factor associated with your business.

Some lenders can also ask for certain  KPIs to understand what the driving forces behind your business are. 

This is a less standard practice, as the aforementioned connections will usually be enough for a lender to confidently calculate the risk factor.

Basic qualifications

There are certain baseline qualifications when it comes to non dilutive funding that you will need to be eligible for funding.

The first and most important is that your business is legally incorporated.

Without legal incorporation, your business can not obtain a business loan.

Options like grants or tax credits are also off the table without incorporation.

The second qualification is related to your business credit score.

While your business health is determined by much more than a credit score, most lenders will require a score of at least 500 to work with them.

Conclusion

While the world of equity financing allows for investment in more risky ventures, debt financing will allow companies that have less risk to access capital that can fuel growth without diluting equity.

Less risk means better terms, and de-risking your business can help you get the deal that you want.

Happy funding.

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