Debt Financing: Is it Appropriate for Your Startup?


Startups are always looking for the best finance option available. High percentage of new startups struggle to secure funding and end up bankrupt. For most entrepreneurs, securing funding requires constant investor pitches and applications to hundreds of startup accelerators. But the reality is that few startups are able to successfully secure funds from accelerators or angel investors. Greater number of startups bootstrap their way to the top when all options prove futile. Bootstrapping requires perseverance and determination on the part of the founders but not every entrepreneur can successfully achieve that.

When all options for equity financing fails, some entrepreneurs resort to equity financing. It’s important to carefully consider all your funding options before you make the final decision to stick with one. If and when you can bootstrap, do not hesitate to take that option. Popular among funding sources include personal investment, angel investment, venture capital, startup incubation and debt financing from other successful entrepreneurs, friends or family and banks.

Debt Funding is an option that allows startups to secure cash or funding by borrowing from a bank or mortgage company.  Debt vs. equity financing is one of the most important decisions facing entrepreneurs today. Entrepreneurs who want control of their businesses opt for debt financing. Debt has proven to be an effective means to secure short-term funds while keeping hundred percent of your business. But debt financing has its negative sides. When you choose to take debt financing, you have to get debt management services to help you plan how to get back in control of your business’s finances quickly.

Venture debt is a form of loan made to startups.  That means it attracts all the features of any other loan — principal, interest rate, repayment terms. On the other hand opting for equity funds comes with equity shares and that means having many bosses, and you risk losing control. But you should remember that equity funds are risk capital that doesn’t have to be paid back. You also have access to more capital in the future when you need funds to expand. Your investors also support you with their years’ of industry experience and industry specific connections.

Both equity and debt financing have pros and cos that need to be accessed with respect to your specific needs as a startup. With the growth strategy and vision of your business in mind, make that decision to the benefit of your business but not just for the founders. Entrepreneurs running businesses on debt are always looking for the next opportunity to pay off the loan. And that puts unnecessary pressure on management or the founders to pay the principal and the interest. Internet businesses can run into huge debt as a result of debt financing especially when you are not making money in the first year of operation. But if you can generate a lot of sales in the first few years debt financing is a good option.

Debt financing is not appropriate for every startup. Consider all the available funding options and make an informed decision about the future of your business.  It’s better to have a small slice of a big pie than going bankrupt.

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  1. Bert Williams, Jr

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