The startup fairytale sure is alluring. The hopeful entrepreneur comes up with brilliant world-changing idea, pitches the product to investors, receives a blank check, leaves desk job, starts company, and becomes the most powerful entrepreneur in the world.
Every year, thousands of individuals strive to make that fairytale into a reality. But here’s the thing, there’s no singular path to business success. Sure, many startups have achieved incredible growth and success after receiving significant angel and Venture Capitalist (VC) backing, but others have also gone on to failure. For every Facebook, there’s 50 Friendsters.
Additionally, as the startup world has matured over the past decade, investors have gotten savvier, or at least, more realistic. Contrary to popular beliefs, Silicon Valley VC’s are not throwing checks at every entrepreneur who pitches them a product. In fact, fewer than 6.5% of high-growth companies raised money from VC’s. When VC’s do invest in a company with potential, they don’t just offer money and walk away. They ingratiate themselves into the growth process and become major decision makers as the company scales.
Similarly, angels – individual investors who offer smaller amounts of capital at earlier stages in the lifecycle of a company – will also not invest their funds and energy into every idea. Like their VC counterpart, angels also require equity and a place at the decision-making table. While their industry guidance can be helpful to many beginner entrepreneurs, new personalities calling the shots during the fragile growing stages can be off-putting to many entrepreneurs who want the opportunity to build their product or service their own way.
So, without VC’s and angels, what other options do emerging startup founders have? While they can feasibly bootstrap the early stages of their ventures, it’s unlikely they’ll have saved enough capital to pull them through product development, testing, and launching. Luckily for new entrepreneurs there’s another way to grow a business without sacrificing vision: financing.
No one really wants to accrue loans at the beginning of a venture, especially if it’s going to take months, or possibly even years, to see any revenue, but financing is a viable option for startups in need of significant capital to see their ideas to fruition.
Debt Financing 101
Debt financing is essentially borrowed money. Lenders give businesses loans to help them launch or run their businesses, and in return, business owners adhere to repayment schedules. Options include both long and short term loans. Long-term loans are typically offered for higher funds to cover the costs of equipment and real estate, while short-term loans are often used to cover operational costs, including workers’ salaries and inventory purchases. While long-term loans are typically requested as a new company prepares to launch or conduct a brand overhaul, short-term loans are often used throughout a business’ lifecycle. When companies run into cash-flow problems, short-term loans are often the go-to solution to pull the business through until sales and revenue pick up again.
How do you know if you need financing?
• Do you need to hire employees? • Buy equipment? • Rent or pay mortgage on real estate? • Maintain cash flow for operational purposes?
If the answer is yes to all of the above (and you have not procured angel/VC investments), then you likely need financing to survive. But before you start applying, there are a few things to consider, such as APR. APR, or annual percentage rate, is the total cost of accruing a loan, including interest rates and fees. Some loans come with massive APRs, so it’s in your best interest to pay attention to fees. You should also be mindful of the repayment schedule. The downside to using debt financing to fuel startup growth is that startup success can be unpredictable. Sometimes even the most promising ideas fall flat. But if you believe enough in the potential value of your product and service offering, then taking on debt can be worth it.
Many entrepreneurs are turning to financing right now because of the freedom that it offers. This way, they won’t have to answer to investors’ ideas and suggestions. Instead, they have the power to build a company on their terms. Furthermore, many entrepreneurs believe now is the time to take on debt through financing because interest rates are low. If you’re an entrepreneur looking for guidance on loans and financing options to grow your next business venture, reach out to the Currency team to learn more about the unique Currency API platform.