Why Startup Founders are Turning to Non-Dilutive Debt Capital to Fuel Growth


There is no doubt that startups are attractive to investors. They offer the potential for huge gains with relatively little risk, and in recent years they have accounted for more than half of all venture capital deals. Many entrepreneurs don’t know about non-dilutive debt financing, which can be a great way to fuel growth without giving up equity. Those seeking traditional bank finance for a startup, for example, may discover that banks are wary of new business models, particularly those using SaaS or software solutions.

It might be difficult for a bank to comprehend a startup’s development potential and assess risk with new or unproven business ideas. VCs are looking for firms that are expanding at a rate of more than 100% per year. It’s no wonder; however, that startup entrepreneurs frequently get confused navigating the maze of funding options for their expansion plans.

Startup funding options relative to the stage of growth

Compared to startups in other IT sectors, SaaS firms often start producing revenue and profitability considerably sooner. Entrepreneurs can bootstrap, raise equity, or seek non-dilutive loan funding if they reach income early in the product life cycle. Many SaaS businesses can acquire early momentum through bootstrapping. Bootstrapping, on the other hand, will only go you so far. Putting off fundraising will eventually restrict your progress. 

What you can and cannot accomplish with your firm in the future is determined by the startup finance decisions you make now. While angel and venture capital investment are popular options for early-stage businesses, Lighter Capital offers non-dilutive loan financing.

Debt capital vs. equity capital

Bringing on equity investors entails granting them seats on your board of directors and adhering to their vision for how your firm should expand; it can limit your influence over the company you founded or, in the worst-case scenario, force you out. Accepting VC or angel money too soon, as well as the time necessary to fundraise, may not fit with your aims at this level.

Startup entrepreneurs frequently use non-dilutive loan funding to delay or avoid equity rounds in their healthy growing businesses. Income financing has become the most popular type of debt capital for companies earning at least $15K in recurring monthly revenue with operating profit of at least 50%, according to the first alternative financing industry study released by Lighter Capital in 2019.

What debt capital means for startup founders

Startup owners that choose revenue-based funding over venture capital transactions keep all of their equity and aren’t obliged to take VC while losing more and more equity to please investors.

As revenue-based finance promises to share a proportion of future income, generally 2% to 8%, in exchange for cash upfront – up to 13% of your annualized revenue run rate – our alternative debt capital model is superior to standard loan rounds.

The debt compensation is based on monthly revenue, with higher payments in months with high income and lower costs in months with low gain. Monthly payments eventually end at a rate of 1.35 to 2X the principal amount, a multiple of the original amount.

The following is an example of how a revenue-based funding round from Lighter Capital may be structured:

  • On January 1, 2020, a $500K loan was funded with a 36-month duration.
  • 1.4X cap ($700,000 in total payments, $500 in principle and $200, 000 in interest)
  • Monthly payments account for 5% of total net consumer payments.

As a result, entrepreneur-friendly loan finance is available, allowing founders to retain ownership and control of their businesses without giving up stock, board seats, sureties, or equity warrants. Payments are also flexible: the borrower pays a fraction of the customer’s cash payments, avoiding cash shortages. Startups may develop with the help of non-dilutive debt capital under this perfect kind of debt capital.

Once the original loan has been repaid, the founders can seek further revenue-based funding, turn to VCs, or use a tech bank to assist them in achieving their next development milestone. The collaboration between Lighter Funding and Silicon Valley Bank allows businesses to access non-dilutive debt capital while also receiving banking services through a single online portal.

Debt capital allows you to keep your choices open for the future

With Lighter Capital’s revenue-based financing, founders have the flexibility to pursue other funding options in the future, which is frequently not feasible when they take VC too early in their company’s lifespan. Traditional means of finance – bank financing, angel/VC equity – become more practical as a business expands and is more established.

Using non-dilutive loan financing to fund your business

If you’re a startup entrepreneur searching for the most cost-effective strategy to fund your company’s development, consider the actual cost of capital associated with each funding choice; debt is nearly always less expensive than equity. Revenue-based finance is an attractive alternative funding solution if you want to build a capital-efficient firm that will expand with you and only borrow what you need while maintaining equity and control of your company. 

Most importantly, you’ll have more time to focus on running your business with our quick funding strategy.


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