Big venture rounds get media coverage, but they’re not the only financing option for startups —or even the most attractive.
VC and other traditional funding streams have steep costs. You cede partial control to investors, who often expect hypergrowth. But the slow funding process itself can stunt that growth.
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Alternative financing options can provide capital faster without sacrificing equity. Here, we’ll look at three.
Option 1: Venture debt
Venture debt is intended for fast-growing early-stage startups. You negotiate a loan based on the outcome of your previous funding round—typically 25 to 50 percent of the capital raised.
Venture debt’s biggest advantage: it helps you preserve your ownership stake.
However, there are downsides. Raising venture debt requires being venture-backed to start. That’s discouraging for founders who either can’t raise venture capital or want to maintain equity.
What’s more, most lenders require profit-draining warrants, restrictive covenants (like minimum cash balances), and a lengthy underwriting process.
Consider venture debt if you want to:
- Extend your cash runway between funding rounds.
- Insure against under performance or unexpected costs.
- Reduce dilution and preserve control.
Option 2: Online lenders
Online lenders can help startups that want a cash infusion—generally less than $100,000— without traditional lending hurdles. They use fintech to analyze personal and business credit indicators.
Fintech can help online lenders approve loans faster than traditional lenders. You may receive capital in as little as one business day.
Digital lending’s speed, however, is also one of its biggest drawbacks. Many loans have terms as short as three months. Daily or weekly repayments will reduce your available cash, making for high-cost capital. These payments can impact your operations and make it difficult to justify investments with delayed returns.
Also worth noting: digital lenders usually provide less money than other options, and some require personal guarantees.
A digital lender could help if you want to:
- Receive quick, non-dilutive funding.
- Get loan approval within hours—and receive capital within days.
- Solve a short-term cash deficit.
Option 3: Revenue-based financing
Revenue-based financing is great for startups with predictable revenue. It lets you receive capital in exchange for a percentage of your revenue or cash receipts until full repayment.
Because you’re receiving cash within weeks—if not days—and making long-term repayments, you can invest in growth that prepares you for the future. Another advantage: revenue-based financing doesn’t require previous VC investment.
Revenue-based financing can also benefit seasonal businesses. Because payments are a percentage of their collections, they’ll pay less in slow seasons.
The downside? Your revenue’s size limits the amount of capital you’ll receive. Your revenue type matters too: financing firms will favor companies with recurring revenue over those with transactional revenue.
You could benefit from revenue-based financing if you want to:
- Keep equity and control over your business.
- Extend your runway, either between funding rounds or to profitability.
- Get a more meaningful amount of capital compared to online lenders – up to 30 percent of your existing revenue.
- Receive funds within weeks, if not days.
- Flex repayment based on monthly revenue.
Choose a funding stream that aligns with your long-term growth
Every funding stream has tradeoffs, but here’s what you shouldn’t trade: your company’s full long-term growth potential and other desired outcomes.
To take control of your startup’s future, you need to grow revenue today. If you’re looking ahead to building a valuable business for yourself and your investors, put your revenue first – it has an outsize impact on your valuation. Alternative funding options can accelerate your progress to your next phase of growth.
Carlos Antequera is the CEO and Co-Founder of Novel Capital, a revenue-based financing platform which provides non-dilutive capital and resources to companies with recurring revenue. He previously co-founded and served as CEO of an education talent management platform which he successfully sold after 14 years.
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Illustration: Dom Guzman
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