How to raise startup capital without giving up equity

With startups dreaming of reaching unicorn status, money is usually top of mind for many a founder – particularly when they don’t have it.

According to the 2017 Startup Muster report, 89 percent of current founders surveyed intended to raise capital either in Australia or overseas within 12 months of the survey period. Meanwhile, of those who had previously run another startup, 11.4 percent of current founders and 11.3 percent of future founders stated the previous venture had closed down as it had struggled to raise the funding needed to continue operating.

As the statistics show, access to capital can be life or death for a business – but it can be difficult and expensive to obtain.

According to Christopher Kent, Assistant Governor (Financial Markets) at the Reserve Bank of Australia (RBA), the big banks prefer to lend if physical assets, such as houses, are presented as collateral.

Speaking at the 30th Australasian Finance and Banking Conference last December, Mr Kent explained, “Many entrepreneurs have limited options for providing alternative collateral, since banks are far more likely to accept physical assets (such as buildings or equipment), rather than ‘soft’ assets, such as software and intellectual property.”

Given many startups trade in the domain of software and intellectual property, this presents quite a challenge.

While startups can, of course, access equity financing, Mr Kent said startups had reported to the RBA that the cost of equity financing is high, with selling equity to professional investors usually involving “relinquishing significant control over their business”.

An alternative option is an unsecured business loan from Savvy, a provider helping to connect startups to flexible finance for their modern business.

Bill Tsouvalas, who founded Savvy in 2010, explained an unsecured business loan is an advancement of capital which can be used for any purpose.

“Businesses can use an unsecured business loan to help them out with their cash flow, for working capital, to invest in software, in resources, people, marketing spend – it can be used for anything,” he explained.

Rather than putting physical assets up as collateral, unsecured business loans are generally underwritten by reviewing the cash flow of a business; in theory, this means that a startup must have cash flow coming in, however for those that are still in the development phase and are yet to push their product out to market, Tsouvalas said lenders are becoming increasingly flexible.

“There are still possibilities to get approved for an unsecured business loan. A company may not have even completed their first year’s tax return, however there is still the possibility to access an unsecured business loan purely by looking at their profit and loss statement in their cloud accounting software program, for example,” he explained.

A Savvy consultant can work with founders one on one to help them find and tailor the right loan for their startup from Savvy’s panel of lenders.

Taking the time to explore your startup’s options is well worth it – as Tsouvalas put it, “Debt is cheaper than equity!”