Three Questions to Ask and Answer Before Pursuing Debt Financing
For early-stage companies seeking debt financing, the most obvious questions are often the most difficult to answer. When is the most appropriate time to pursue debt financing? Why should you consider debt at all? And how much should you borrow? At Capital Advisors Group, we’ve advised hundreds of companies on billions of dollars of debt financing needs over the past 16 years. And those three simple questions always seem to create the most confusion.
Our latest research report, WHEN, WHY and HOW MUCH: Common Misconceptions in Early-Stage Debt Financing, examines each of those questions. If you are considering debt financing as part of your company’s capital structure, it’s a must-read.
For privately held startups seeking faster growth, venture debt can be a shrewd financing strategy. Debt tends to be less dilutive than equity, it can provide a cash cushion for the transition from product development to product launch, and it can provide a bridge between venture financing rounds.
But many early-stage companies that have just deposited their A-round funds fail to consider a long-term strategy that may include debt financing. Instead, they answer the question “when?” by taking the first line of credit the bank offers and calling it a day. They may then discover too late that it’s often better to look before you leap. Instead, if you spend some time coming up with a short-, medium- and long-term plan for your capital structure, you can shop for the right lender offering the right terms, at just the right time.
Answering the “how much?” question can also pose challenges. Some old startup hands will tell you there’s no such thing as too much cash on your balance sheet. After all, you never know exactly what your upcoming cash requirements may be, so grab as much as you can whenever you can. But our report shows how a more carefully considered capital structure can add enough debt to get you through critical milestones—even if the total borrowed is less than what you’re offered. In other words, “just enough” debt may provide more leverage than paying for a surplus that you won’t need.
Of course, “why?” may be the most important question of all. As you might expect, the answers are varied and complex. Our report includes a case history of a client company that carefully thought through its reasons for seeking venture debt. The result was a successful financing deal that supported it through an acquisition by a strategic partner. But no more spoilers here. To find out more, download the report today.