Debt Options for Founders

Debt options (as well as loans) are an excellent alternative to raising investment. Raising capital is already competitive, and companies that aren’t in Research & Development are looking at new ways to inject their business with cash. Not only do loans give businesses the freedom to spend funding how they see fit, but they also usually don’t require businesses to hand over equity. Read on for 10 debt options for start-ups and scale-ups founders.

• Secured Loan

UK businesses looking to inject cash into their business quickly often turn to secured loans. Secured loans utilise assets as security, which makes it less risky for the lender if you don’t keep up with repayments. Business owners are more likely to get approved for a secured loan than an unsecured loan, as well as borrow more money, have longer term agreements, and benefit from lower interest rates. Secured lending is sometimes referred to as asset-backed lending. Business owners should not go into secured loans lightly – if you fail to keep up with the repayments, you are at risk of losing the asset you put up as security.

• Unsecured Loan

Unsecured loans are generally more simple and quicker to carry out than secured loans. They allow you to secure a loan without having to use your assets as security, and therefore less risky. However, they are riskier for the lender, so the lender will require reassurance through your revenue, credit score, business history, forecasts, client history, and more. They might still ask for a personal guarantee.

• Working Capital Loans

Working capital loans are short-term debt options used for day-to-day operations. They are typically paid back in under a year. Working capital is also sometimes referred to as ‘net working capital’ or ‘NWC’, and it measures the difference between the company’s current assets (cash, inventories, accounts receivable) and its current liabilities (accounts payable and debts). If a company has positive working capital, then the assets are worth more than the liabilities, and therefore enough to cash to fund the day-to-day operations. However, if a company has negative working capital, then there is no surplus cash, and it might not be able to fund the daily running of the business. In the case of negative working capital, the company could face bankruptcy, so working capital loans are a great way to stay afloat through periods of low sales. Businesses that sell seasonal goods or services and those fluctuating sales cycles are the most common beneficiaries of working capital loans.

• Supply Chain Finance

Supply chain disruption is one of the biggest challenges that UK businesses face. With long payment terms, slow goods deliveries, and large corporations dominating world trade, it can be hard to manage cash flow. However, supply chain financing keeps everyone happy and paid by paying the supplier early. These loans provide unsecured cash advances to the supplier, so the buyer can pay for the supplies at a later date. It’s a mutually beneficial deal between the buyer, supplier, and lender. However, it is anchored on the buyer’s credit score.

• SaaS Finance

This financing option is specifically catered towards startup and scale-up software as a service (SaaS) businesses. It is not technically a loan – there is no personal guarantee, it has no interest, and it has no impact on your credit score. It is a revenue-based capital investment, without having to hand over equity. The repayments are based on the company’s revenue, so they increase during times of high cash flow and slow down when there the business is making less revenue. SaaS companies benefit particularly well from this type of financing option as most have subscription models, which means different payment periods throughout the month, quarter, or year.

• Match Funding

Match funding is in relation to business grants, which are an excellent way to help small businesses expand and invest. They’re often provided by the government, grant organisations, or charities and are a crucial funding source for many businesses starting out. Unlike loans, grants do not to be repaid, and they do not build up interest. However, grant organisations sometimes ask for the benefitting company to raise match funding. This helps keep the grant organisation operating, as well as prove that the business owner is serious about the company and can raise the capital to support it. The match funding amount is usually a certain percentage of the total funding. The organisation will supply the rest. This percentage is typically 30% or 50%.

• Grant Advances

Sometimes, grants are permitted under the agreement that a company hits a certain milestone or completes a certain project before the funds are released. However, sometimes companies need the funds in advance in order to complete a project, hit a milestone, maintain cash flow, or meet financial obligations. This is where grant advances are incredibly beneficial. Grant advances provide companies with a portion of the future grant before they have met the terms of the agreement. This sum can be up to 80% of the total grant, helping improve cash flow and progress with projects. Grant advances offer invaluable flexibility and help companies to strategically allocate resources.

• Revolving Credit Facility

A revolving credit facility is much more flexible than a fixed business loan. It’s an open-ended line of credit that allows you to quickly withdraw funds when you need it and repay when you can. When you’ve repaid what you’ve borrowed, you can borrow more within the agreed term. There is a fixed interest rate, which is charged on the withdrawals, not the whole credit limit. The credit limit is typically the equivalent to the company’s monthly turnover, and if you prove to be reliable with repayments, the lender might increase it.

• Management Buyout Finance

A management buyout is a common exit strategy in which a company’s management team either buys shares directly or indirectly buys the company’s assets and operations. It shifts ownership seamlessly while keeping it in the business. It’s rare that the management team would have enough capital to buy shares outright, so external funding is usually needed. Popular loans to assist a management buyout include bank or finance business loans, asset finance (using property or stocks), and private equity.

• Mezzanine Finance

Businesses don’t always qualify for traditional loans, whether that’s due to the sector they’re in or any debt they have. To avoid the business going into bankruptcy or selling equity, mezzanine finance is a great solution. It sounds simple enough: business owners can borrow the funds they need, and the repayment terms are tailored to the individual circumstances. However, if the business owner fails to meet the repayments and the terms of the contract, then the lender is entitled to equity in the business. Business shares essentially become collateral, so opting into a mezzanine finance plan isn’t a light decision. However, it can be incredibly useful in many circumstances, including paying off existing debt, management buyouts, shareholders buyers, restructuring balance sheets, and more.

How Finerva Can Help

While we don’t provide loans, our expert team offers grant support. Applying for grants and loans can be a complicated process, so getting the right support and being armed with the right knowledge is crucial. And when there are so many loan, debt, and grant options out there, choosing the right one to suit your business can be a challenge. At Finerva, we will work with you on perfecting your application, increasing the chance of acceptance. Get in touch for more information.