How to Best Prepare to Raise Debt for Your Startup


Deciding to Raise Debt

At this point of your fundraising stage, you have probably decided whether or not to raise through a debt financing round. There are many factors that contribute to this decision including management control, use of funds, how much capital you need, your fundraising timeline, and so much more. When choosing debt, you are also choosing the debt instrument. Depending on your need for the capital, you can receive debt in the form of loans, lines of credit, cash advances, and other types of debt financing that you can learn more about here

Once you come to the decision of funding your startup with non-dilutive capital, you now have to prepare for the raise. In this post, we will give you tips and guidelines on what to think about when you are beginning to raise your debt round as an entrepreneur. Many of these tips are applicable to all types of fundraising but are slightly different when viewing it through the debt lens.

Get Your Numbers Ready

Any potential lender will want to see your sales data and financial statements before they give you capital. The main financial statements that you would need to present are the balance sheet, income statement, and cash flow statement. If you are a fairly new company, then you may not have these statements. That’s okay, and you can send what you have. Otherwise, you can easily retrieve these statements from an accounting system of your choice.

With your financial statements, you will also need to present your important metrics and KPIs and how they drive your business. Figure out your industry’s most important metrics and be prepared to explain how your business currently stands or will stand based on those KPIs.

Build a Solid Roadmap

With any pitch for an investment, you’ll need to have at least a 12 month forecast of your company’s growth. The same applies for a debt financing lender. Your initial forecast will likely be a stretch goal for your company, meaning that the growth is ambitious and your potential lender will naturally have lower confidence towards that goal. It can be best to separate your forecasts into three different tiers. The first tier is your stretch goal. The second tier is the middle ground, where the growth is slightly ambitious, but there is greater confidence in achieving it. The third tier is the one your lender is most likely to believe where the growth isn’t as ambitious, but the confidence in achieving it is extremely high.

When creating these forecasts, make sure that each goal is still realistic for your company and industry. You don’t want to make it look like these are goals for three completely different businesses. 

Along with your forecast, you should also prepare other targets you want your company to achieve, as well as a good idea on what you think your company is worth. Prepare a timeline for each stage of your company and how long it might take to reach each target. Building out a timeline will prepare you for cash flow management, ensuring that you have sufficient runway to hit each target that you planned.

Choose Your Lender Wisely

Choosing the right lender is extremely important, and doing your due diligence is in your best interest. Some items to consider are if this person really understands your business, if you have built a relationship early on with this person, and if you have your own due diligence process to see if they are a good fit.

Keeping those considerations in mind will save a lot of headache in the future. You don’t want to be in a position where you are teaching your financier technology pertinent to your business and industry. If you and a particular lender have a mutual network, then leverage your network and ask other entrepreneurs their experiences with them. Lastly, be aware that lenders typically have certain funding profiles. So if you don’t fit that profile well, then save your time and move on.

Final Preparations

After you’ve done your main preparations with gathering numbers and metrics, forecasting, building out your roadmap, and doing your due diligence, be sure to tighten all other loose ends that lenders and investors also consider. Having a great team that shares a common vision that you can trust and solving smaller issues that may not necessarily need capital puts you in a great position. The bottom line is that you want to be prepared enough to convey a story that lenders are confident in to help grow your business.

Continue reading

Join our community

We're active on Slack, and love to meet new people. Join us!
Slack invite