Growing on your own terms
4 mins read
If you’re a founder with a groundbreaking idea, who is putting in the work to build your idea into a profitable business, what do you consider when raising capital?
The topic of raising capital is probably one of the foremost on your mind. Let’s face facts: executing great ideas excellently is, among many other things, powered by money.
The journey of raising capital is by no means an easy one and can take a negative toll on you and your business if not done right. There is a myriad of options you can consider when raising but, for most founders, the choice boils down to debt or equity financing.
Following conversations with founders with skin in the game, including Lipalater’s Eric Muli, we put together some questions whose answers we believe can help you decide what funding option works best for your business per time.
We encourage you to take some time to listen to the conversation in the video below before you continue your read:
What stage of growth is the business at the time of the raise?
Generally, younger businesses or businesses still validating their business models are advised against considering debt financing. Growth costs money, which many businesses may not be to pull in revenue, right off the bat. With equity financing, you can access extra working capital to grow your business, as well as advisory from investors with expertise, who believe in the business and have stakes in its growth.
For older businesses, who have been able to validate their business/revenue model, debt financing becomes a more attractive option – especially when attempting to meet goals that require heavy capital such as expanding to new locations/demographics or acquiring property/equipment that will yield profit. At this stage, businesses should have enough revenue and liquidity to cover the cost of borrowing. Furthermore, a track record enables to lenders can make informed decisions on the business’ ability to repay loans and can be a steppingstone for the business to access more money.
How much of your business success is reliant on ownership and control?
Many entrepreneurs are wary of equity financing because it requires them to dilute ownership of their businesses. This would also mean a dilution of their decision-making power and profits. While it is a valid concern, a good perspective to consider is that a 100% of zero is zero. Equity financing places less financial burden on a business than debt financing. As there is no obligation to repay the money you acquire through it, you have more capital to pour into growing the business. The question then becomes whether, by your estimation, this is a fair price to pay to ensure your business success or how it may affect same in the long term.
How does either choice fit into your 5-year financial plan?
Knowing this will enable you visualize the amount of funding you will need to remain a competitive player in your field per year. This, in turn, should influence your decision on the type of funding to access. If, for example, your projections predict that you will need to acquire a new business space or equipment to boost production and meet up with demand, debt financing would be a good option to aid your cashflow in that period.
What is best for the business in the long term?
Your decision should ultimately lean toward what option will get you the money you need, when you need it and on terms that do not narrow future options or put them at risk.
The decision to raise capital should go beyond the business’ need for money. It must be strategic and geared at achieving a specific goal. Many founders end up taking on a mix of both types of financing depending on their overarching business goals.
At Advancly, we Power Progress for founders and businesses looking to raise capital without diluting their equity. With Advancly Spark, you can access debt financing to build the business of your dreams and grow on your own terms.
Like to know more?
We’re hosting a Twitter Space soon for founders and techies to rub minds on everything raising capital. Keep an eye out for our posts on social media to know when you can hop on the conversation.
About LipaLater
LipaLater is building a world where consumers can be equipped to afford products they need to make everyday life easier and improve their quality of life.
They provide instant access to credit by enabling Buy Now Pay Later (BNPL) services which allows people to shop for their needs affordably. So if you need to purchase something, and you want to use credit for that purchase, LipaLater will partner with you to help spread your payment over an agreed period of time.
They are proudly our Progress Partners.