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The time has come to take a big step forward in the growth of your technology company. Whether you are looking to launch a product, or perhaps expand into new markets, you will need additional capital.
The two most common funding options for tech entrepreneurs are equity or debt financing, which is also called term debt. Although equity financing through the venture capital market is better known to tech entrepreneurs, debt financing offers several advantages that make it an attractive option.
Unfortunately, tech start-ups, having few assets, have traditionally had trouble accessing term debt. But as Canada’s tech sector continues to grow, reaching a value of $9.1 billion and providing employment for 864,000 Canadians, many financial institutions have adapted to better serve entrepreneurs like you.
Is term debt the right fit for your needs? There are six compelling reasons to consider it to fund your growth.
- Term debt is non-dilutive. Unlike equity financing, debt financing does not require you to give up any ownership or shares of your company, thus you maintain more control over its development and growth.
- Debt financing is patient. Since lenders do not claim a share of your company, and thus do not share in the earnings potential of your project, they mitigate risk with guarantees for loan repayment. The benefit is that you often have time to reach a certain level of revenue before you are required to start repayment of your loan. That means you can grow your company with less pressure to generate an immediate return on investment.
- Debt financing is quicker. Typically, the due diligence for debt financing is relatively straightforward because it does not involve an independent valuation of your business. This means you could gain access to the financing you need more rapidly, and thus achieve your growth goals quicker.
- Access is easier. With debt financing, there is the potential to access capital more frequently if your company experiences unanticipated growth, an option that is not always available through equity financing.
- Term debt is more inclusive. Venture capital firms generally have very specific criteria that guide their funding decisions and will look at hundreds, if not thousands, of businesses before finding one that meets their requirements. For example, some equity funds only invest in cleantech companies, which significantly narrows the field of candidates they will consider. Debt financing, however, is decided mainly on your company’s business model and cash flow, which means it is often more readily available for tech entrepreneurs like you.
- Equity financing favours disruptors. Your growth targets may make debt financing more practical than an equity raise. Equity investors tend to look for industry disruptors—companies with the potential to grow 10 to 20 times their current size in just a couple of years. If your goals are more modest—such as doubling or tripling in size over that same period—it is unlikely you will attract equity investment, making debt financing your best option for securing capital.
In addition to these advantages, debt financing can help you secure other types of financing in the future. In some cases, it can be the fuel your business needs to be considered for equity financing. It can also help you get a more positive valuation and better terms once you turn to venture money.
What to do to get a business loan
If debt financing is right for you, there are several steps you can take to increase your chances of successfully securing a business loan:
Review your current operations and financials to present a solid business case.
Consider the terms for repayment, the collaterals you can offer and the interest rate you can afford.
Be prepared to demonstrate how you will repay your loan.
Most important of all, look for a bank that understands the tech sector and offers customized lending products geared toward tech companies like yours. That way, you will not only secure financing, but also have the necessary support to make your growth possible.
Michael Oldfield is a Senior Account Manager with BDC's Technology Group based in Halifax. Michael provides flexible financing and advisory services to technology firms in Atlantic Canada to help accelerate the growth of the knowledge based industry. Michael will be speaking at the Funding Founders on Sept. 18 in Halifax.
