how many years Previously, founders had only two options when starting a company: launch yourself or turn to VC money, which they used primarily to pursue growth. Later, subprime debt began to gain popularity. Although not dilutive, its problems are similar to those of VC equity: it takes time to secure, involves guarantees, is not very flexible, and not every startup can get it.
But in recent years, more options have been available to founders. Most startups can now take advantage of non-dilutive capital, and special purpose financing has entered the fray.
While venture capital remains the most popular avenue for startups, founders should take advantage of all funding options available to them. Using an optimal mix of capital resources means using affordable, short-term funds for immediate goals and more expensive long-term money for activities with uncertain returns on the horizon.
What is income-based financing?
Let’s define it as capital provided based on future income.
While venture capital remains the most popular avenue for startups, founders should take advantage of all funding options available to them.
So what is unique about income-based financing? First, it comes up quickly. Compared to the months-long process typically associated with other forms of equity or debt financing, income-based financing can be set up in days or even hours. It’s also flexible, meaning you don’t have to withdraw all the capital upfront and choose to withdraw it in chunks and deploy it over time.
Income-based financing also increases as your credit availability increases. There is usually just a simple fee with a fixed monthly repayment.
How should startups evolve their financial playbook?
To optimize fundraising using different sources of capital, startups should think about aligning short-term and long-term activities with short-term and long-term resources. Income-based financing is shorter-term in nature, with a typical term of 12 to 24 months. Venture capital and venture debt are long-term sources of capital with a typical duration of two to four years.
A startup’s short-term activities may include marketing, sales, implementation, and related expenses. If a startup knows its economics, CAC, and LTV, it can predict how much revenue it will generate if it invests a certain amount in growth. Since the return on these activities may be greater than the cost of income-based financing, startups should use income-based financing to finance projects that will soon come to fruition.