Debt-based fundraising, or loans, is very simple: money is borrowed by a company that they must pay back at a later date with interest. It is the most common form of outside capital. Collateral assets also play a big part in the process of Debt-based financing as it serves as a deposit in the event your business fails and the lender pressures to get their loan back. Having assets can secure a payback or in other cases having assets can leverage a larger loan.
Dept-based financing is most beneficial when:
Less significant amounts of capital are needed.
Quicker access to capital is required.
Funds are necessary for particular purchases such as equipment and property.
Equity is not an option for you, personally or legally.
Considerations when contemplating a Convertible debt
Choosing the right type of investor base for fundraising to suit your needs the most should be based on the stage, size, and industry of your business. Other factors to consider should consist of what is your ideal time frame to achieve long and short-term goals and how much are you willing to raise for a particular purpose?
When you should consider equity instead
In some situations, instead of a Convertible debt, you should consider Equity as it would make the most sense to your company's needs depending on working capital and cash management practices.
When you need a LONG runway
When starting a business, it is not guaranteed high levels of revenue will be realized immediately. The reality is that it could be years before being cash flow positive. This however does not indicate a company’s failure but rather as a growing opportunity for future capital raise rounds. In other words, equity investments are a must as they would serve as working capital to sustain your business before it thrives and brings back profit.
When you have zero collateral
To attempt a convertible debt, you will need collateral assets as a safety deposit in case your business does not grow as expected. If you do not have any assets, then equity funding is the option for you as investors would fund your business based on the belief in your future achievements rather than liquid assets.
When you can not possibly bootstrap
Ideally having to build your business little by little at your convenience might sound appealing, but in reality, some business requires a massive amount of capital to get their feet off the ground, therefore capital injection from equity would be better than taking on debt.
When you are positioned for astronomical growth
Equity investors love when a business has the potential for exponential growth, as it reassures them that their investment will potentially exceed ROI expectations. In this case, a new company’s management, operations, and business model must be seamless to attract investors. Without a strong foundation, it will be harder to receive the capital you need for growth. If you work through debt-based financing, look at your business structure and see if the model is sustainable with current capital injection practices.
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