How can I find non-dilutive funding during my startup’s early stages?

It is a well-known fact that private capital is the main source of funding used by innovative companies in their initial stages, when the risk is higher. There are investors willing to take on that risk in exchange for a stake in the company’s capital, as by becoming a company shareholder they can increase their risk appetite, hoping to get a good return on their investment.

Bank funding does not involve giving up a share of company’s capital and it is not dilutive for entrepreneurs, making it a much cheaper option for a company, which has only to repay it with some interest. But here the risk/reward ratio also comes into play: banks need to take on smaller risks than private investors, as they do not have the same potential for high returns that investors have.

But that does not mean that a Bank cannot fund startups, as we can find situations in which the risk is controlled or relatively low. And using funding sources with a more moderate risk profile, such as banks, could be the right decision for a startup’s financial strategy.

What type of bank funding would be ideal for my startup?

When we talk about controlled risks, two key factors are taken into account: the duration and the certainty of future repayment. For this reason, bank credit lines and facilities designed to manage cash flows could be a good solution, helping to meet working capital needs and extend the runway.

Using bank funding to cover cash flow gaps generated between incoming and outgoing payments for B2B startups could be a good idea, as it can provide additional headroom and boost sales growth.

Bank funding can also be a good tool to tackle projects supported by public funds. If achievement of the project’s milestones has been validated and if repayment is certain, we can even potentially offer an advance, helping you to improve liquidity. Another example would be the monetisation of tax incentives for R&D and innovation, for which an advance can also be requested.

Other instruments such as loans or leases can help fund assets that require longer amortisation periods. To access these instruments, it is vital to have sufficient foresight of the cash on hand that will be needed to fulfil commitments during the funding period.

How to increase the chances of success when applying for bank funding?

As mentioned, bank funding could be an ideal solution for working capital, so customer billing and supplier invoices are a must, and bank funding can be used to cover any cash flow gaps occurring between incoming and outgoing payments.

Another key factor is the company’s financial structure. It is important to have sufficient good-quality own funds to deliver your company’s strategic plan, in addition to a long-term forecast of capital needs, as this will help to keep a balance between your own capital and borrowings.

And of course, to ensure your company has sufficient cash on hand to honour its future commitments.

Although it is not typically the main source of funding, bank funding can be a good way to supplement the overall funding strategy.

Anything else to bear in mind?

As in any negotiation, it is important to provide a detailed explanation of the company’s current situation and the identified funding needs, and to justify the cash and business forecasts that determine the ability to satisfy future payments and repay the funding.

Bearing in mind the fast pace of development in startups, it is very important to have and provide up-to-date information about the company on a regular basis, as well as a simple yet effective financial analysis.

It is also important to bear in mind that for the later stages of your startup, and for scaleups, we also offer more sophisticated funding instruments. One example is Venture Debt. While not non-dilutive, its dilution is small compared to Venture Capital.

Remember that bank funding can be an excellent form of financial support for your startup’s growth. If you need any advice, do not hesitate to get in touch.

Enric Chiva
BStartup Commercial Director