What are the alternate ways to get funded? Here are some options you probably didn’t know.
Updated: Mar 13
From venture debt to revenue-based financing, there are more and more options for founders who need cash.
Whether you raised funds from a traditional VC or angel investors, equity was practically the only option for growing your startup in the old days. Founders frequently find themselves in the "take it or leave it" scenario.
In India, things started to change a few years ago when, little by little, new forms of funding and capital were introduced. Those include options like venture debt and alternative finance.
Traditional equity VC still plays a major role in funding new businesses, and we believe they will remain indispensable due to their ability to provide large amounts of cash even under uncertainty. But now, as markets have become more volatile and funding more challenging, alternative forms of finance are stepping into the spotlight.
One explanation is obvious: different financing options offer better chances of cashing a check when cash is scarce. Given the complexity added by the various funding and capital sources, founders should take their time to learn about their options rather than outsourcing the choice.
If you can combine debt and equity, then really, that’s the secret sauce.
The future of funding will be raising the right kind of capital at the right time, whether it is Venture Capital (equity) or Alternative funding like Revenue-based financing, Subscription-based financing, Term loans, Invoice financing, and so on.
Alternative sources of funding are important because, generally speaking, not every company is a good fit for venture capital. For instance, some businesses cannot or do not want to meet the high growth requirements of traditional VCs or accept the significant dilution that comes with selling a stake in your company in exchange for money. All types of financing may experience an increase in volume as the market expands, though some may do so more quickly than others.
Due to its function as leverage on equity, venture debt investment and alternate finance volume may increase in lockstep with VC, as debt gains its reputation and startup shareholders discover the virtue of leverage. Asset-backed lending, however, will most likely stay relatively small as it requires real assets, which few startups have.
To benefit from this development as much as possible, founders will have to change the way they think about funding.
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Alternative financing methods allow for faster capital provision without compromising equity.
For companies building the future, here are some new age financing methods:
Invoice financing or factoring: Invoice discounting is using your business’s unpaid invoices as collateral for loans. Lenders give businesses a cash advance, which is a percentage of the invoice’s value. Businesses can improve their cash flow and working capital cycle by selling their invoices and gaining quick access to cash.
Revenue-based financing: Revenue-based financing is great for startups with predictable revenue. It lets you receive capital in exchange for a percentage of your revenue or cash receipts until full repayment.
Term loans: Founders can apply for term loans that have a fixed amount of money that must be repaid over a predetermined time period. Alternative-term loans have fixed interest rates and a predetermined number of payments, much like bank loans, but they are not secured by collateral.
Recurring Revenue financing: It is a form of business credit that offers cash advances in exchange for recurring monthly or annual revenue (MRR or ARR). Founders can access upfront capital, lower the cost of managing cash, and invest in growth strategies using revenue financing. Software as a Service (SaaS), e-commerce, and subscription-based businesses typically fit this type of financing the best.
Anchor-backed Financing: This type of funding aims to help companies with their short-term funding needs and assist small and medium-sized companies that sell goods to or purchase from large corporations (anchors). Supply chain credit can be obtained under the anchor finance system for purchases or sales involving large corporations or anchors.
Purchase order financing: This type of funding allows companies to pay for the supplies or products required to complete unfulfilled purchase orders. Manufacturers, wholesalers, distributors, import/export firms, and other businesses in a variety of industries may find this type of financing to be a viable option.
Having trouble deciding which funding method is best for your company? Let's just say you're in good hands!
With Debtworks, comprehensive growth funding solutions are easy and accessible. That's not all; we will customize a debt solution to fit your needs.