Starting and growing a new business is one of the most challenging endeavors you can take on. Many businesses fail because they do not have enough money to keep running. More than 75% of small business startups fail due to a lack of capital or growth financing. Startups are risky, and old-school banks are risk-averse, so getting a bank loan is often difficult for an early-stage startup company.
However, regardless of where your start-up business is at in its lifecycle, one thing remains true: it needs capital. If you are starting a new company or growing an existing one, the search for growth capital can seem like a daunting task.
This guide will help you get your startup financed and started on the right path with more funding.
The Current State Of Debt For Startup Growth Capital
Debt is a four-letter word, but it is not always bad. In fact, it is advantageous in the right circumstances. And there are plenty of right circumstances, too. Start-ups rarely have any significant operating history or revenue, which means they don't have a sufficient cash flow to cover their expenses when the bills come due. Not all startups can bootstrap their business to success.
That can leave them with two options: take on debt or starve. With interest rates at historic lows and the bank of mom and dad still willing to help out, it can make sense for small businesses to borrow money to meet their requirements.
While debt can be a good thing for businesses, it is essential to understand the current state of debt for start-ups and what you need to know about it. Debt financing is an attractive option for start-ups because of its flexibility, low cost, and quick turnaround.
However, if misused, debt can do severe damage to your business. If a company's debt-to-asset ratio gets too high, it will become pretty challenging to pay off debts! However, according to the latest Global Debt Survey by KPMG, about 87% of all new businesses surveyed were found to have been impacted by business debt within their first year of operation. The average amount of debt that a start-up has racked up is around $125,000. That's a big pile of debts for a lean startup to overcome along with all the other obstacles they are facing.
This number can skyrocket quickly depending on your industry and whether you have a co-founder with a sizable financial net worth. Many start-ups will go into debt at the beginning stages of building their company and face significant challenges paying off that debt as they scale and grow.
Banks and Credit Cards: Two Main Sources of Growth Capital That Are Not Working Out
Banks and credit cards are two primary sources of capital that have been the main sources of growth in the past. However, it is becoming increasingly clear that these traditional sources of finance are not working out.
New technology disrupted traditional banking, and credit card debt has grown to unsustainable levels. These two factors have led to changes in how people borrow money, creating a massive need for new ways to provide capital.
Banks can't lend enough money to start-ups, and credit cards need to be paid off in full every month. The problem is that these companies create a lot of debt for their customers without allowing them to borrow money when they need it most.
Non-dilutive financing is a better option for start-ups and small businesses than the traditional sources of finance because it allows them to keep more equity in their company while borrowing money to fund their growth.
Growth Round: Do I Need It?
A growth round is a financing round used by start-ups to accelerate their growth. In a growth round, investments are made based on milestones rather than equity and are often accompanied by convertible notes or SAFEs.
The goal of a growth round isn't to generate the greatest return on investment; it is to provide the capital necessary for the start-up to grow. Growth investors are often more interested in helping start-ups reach product-market fit and scale than they are in generating the highest return possible.
The Best Time To Raise Money Is When You Don't Need It!
You are more valuable when you have the cash to burn because potential investors can see that you know how to spend money well. Investors like to fund companies that don't need their money. When you need funding, it is hard to convince investors that they are not just throwing good money after bad.
And they want insurance that they will get a return on their investment. If you have already proved your company is successful, then it is easier for them to trust your future growth plans because there is actual proof of your past successes.
You Will Get Rejected, But Don't Take it Personally
There are many reasons why a person may be rejected when applying for growth capital or funding. If you take these rejections personally, it will not help you grow your company.
Growth is natural for any business, and the only way to ensure that it will happen is to get funding and capitalize on any opportunities.
When you pitch your idea in the start-up world, it is very common to get rejected. You need to have thick skin and not take it personally. In order to prevent these rejections from affecting you too much, it is best to pitch your idea to multiple people before deciding whether or not you should pursue it further.
Furthermore, to prevent getting rejected, make sure that you pitch your idea at the right time. If a company has recently had a funding round, it might not be willing to take on more projects until they recoup their earlier investments.
Growth Capital Conclusion
If you are looking for growth capital, there is no need to give up. As long as you have a good plan and the motivation to follow through, you can find the funding your startup business needs. Just remember that it will take some time and effort on your part, so make sure to follow our advice from this article if you’re ready to start searching for growth capital.
