It might be very challenging to fund startups and small-to-medium-sized enterprises when funding through equity is not desired. There are newer modes of innovative debt financing to offer businesses alternatives that help stay flexible and will not reduce ownership. Here’s the best option to grow that funding without giving up equity, which is revenue-based financing.
ALSO READ: 5 Financial Habits That Will Transform Your Wallet
1. Revenue-Based Financing (RBF)
Revenue-based financing is debt with the eligibility of paying loans based on a certain percentage of monthly revenues instead of paying a fixed amount. This, therefore, will particularly be very suitable for start-ups with seasonal revenues. Repayment adjusts according to cash flow. RBF allows founders to maintain equity and enjoy scalable repayment plans as the business scales up.
2. Invoice Financing
Also known as accounts receivable financing, invoice financing enables companies to borrow against outstanding invoices. For businesses with long billing cycles, this presents a way to bridge cash flow gaps without waiting on clients’ payments. Lenders usually advance 70–90% of the invoice’s value and collect directly from the customers, making it a low-risk way to unlock capital for operational needs.
3. Convertible Debt
Convertible debt is a hybrid instrument that initially starts off as a loan but may be converted into equity if certain conditions are met, usually in the form of a future funding round. In this manner, it keeps the option open for startups to receive early-stage capital with a delayed equity impact. Once the company grows and meets the milestones set forth, the loan converts into shares, often at a discount, to the benefit of both the company and the investor.
4. Crowdfunding Loans
With debt crowdfunding, it is now possible for startups to raise funds from individual investors online. Borrowers can now create campaigns with their business plans and raise funds from the crowd at competitive interest rates. Crowdfunding loans make the process visible while testing market demand for their startup ventures as they get funding.
5. Asset-Based Loans
Asset-based loans require companies to use inventory, machinery, or real estate as collateral to raise the required financing. This helps SMEs tap into the capital available in the assets they own without losing equity and providing flexibility in growth initiatives.
Choosing the Right Debt Option
Startups and SMEs should compare each of the debt financing options with their cash flow, growth trajectory, and long-term goals. Such innovative financing options can provide businesses with funding that will meet their needs while allowing them to maintain control and ownership.
