How much does startup debt actually cost?

would you lend to your business we usually talk about raising Equity or selling your company on this show but today I want to talk about debt and that's exactly why I brought on Kyle Rector today our resident expert in debt that we partner with all the time on debt deals and we talk about all the different types of debt that you could potentially use for your business and how you can get access to those how would a Founder prepare themselves to secure debt I think with any business looking for debt um really start with that question which is hey everyone welcome back to fundraising demystified today we're taking a little bit of a turn from our usual episode to focus on an important topic around debt and working capital for technology companies it's a topic that we haven't really do dove into in the past yet we talk about fundraising all the time it's usually around Equity this time I wanted to talk about the other type of capital uh specifically debt and different types of shapes and forms that can come into and to do that I wanted to bring in one of our partners that we work with on multiple debt deals Kyle Rector president and co-founder of boundless welcome to the show Kyle thanks for having me Jason no I'm excited to have you and and join in this conversation and kind of speak to your experience having done the deals that you've done and get into the actual nuts and bolts of how companies get that financing and all the different Tye uh shapes and forms that can come in before we do that I would like for you Kyle to just tell everyone a little bit about your background and a little bit about boundless for sure so I've been in the debt financing space now for over 10 years uh some of the leading digital lenders in the space and uh started boundless roughly two years ago as a way for borrowers and lenders to bridge that Gap and understanding the other sort of risk model right uh what boundless is is a capital Marketplace that matches businesses to lenders based on that risk criteria so that borrowers aren't out there searching for Capital from lenders that may never approve them right um it's a bit of a black box I think today just given how quickly this industry moves so one of the things that we really prioritize is making that Capital application process and the actual sourcing of that facility as efficient as possible just so that Founders can kind of get back to what they need to do to grow that business just in terms of kind of where we're at as a business boundless again it's been around for two years as a bootstrapped company we've seen over the last year just over a billion in capital requests now that span the range of your small business Capital requirements $5,000 term loans all the way up to a few hundred million and that spans businesses of every industry uh every size every geography including the US Canada UK uh and others there so we have a really good understanding across those those businesses that we've seen as to what it takes to actually secure funding and how to go about thinking uh about debt financing as a Founder when it comes to your total Capital stock and how that can impact your business that's exactly what I brought you in the show is given your depth of experience in this industry working on hundreds of deals you know to the tune of you billions of dollars in requests it's really to help us have a productive conversation on helping our audience understand what's available to them you know and what would they potentially qualify for and before we go into the the details uh of this this episode if you could just walk our audience through what is debt and in the terms of like you know what we're leading into and the different types of debts but like what is debt and how does it comp comp to to raising Equity how should Founders think about those two options yeah for sure so debt whether it's business or personal operates in the same capacity where effectively someone is taking capital from another party with the promise of repaying that Capital at a certain point in time unlike Equity financing which a investor may receive Capital back upon some type of liquidity event debt is more formatted to specific maturities uh terms repayment structures that give a lender more confidence and them actually being able to rou that capital in a defined amount of time unlike potentially Equity so it's a little bit different in terms of the expectations that A lender might have as well as a borrower as opposed to equity financing and also the implication that that Capital when taken from a debt investor uh should have on the business right typically I think when you're taking Equity Capital you want to be investing that in things that might have a 10 00x return on the value of your business as opposed to debt which should be a little bit more Purpose Driven Project Specific and mainly around things that have a more repeatable or um understood expectation of the impact that it'll have on the business and I'm glad you bring that that warning and most Founders they think only Equity you know that's what Mo you know comes to most Founders Minds when they think about going out and securing capital and a lot of complain about the that delution but the benefit of delution to the cap table is there's no obligation to pay it back you know they're betting on you taking the risk with you in the event that you don't hit a home run you there's no one knocking on your door after you're you know making you file bankruptcy and you know pay back their debts and have these really complicated situations often why most Venture investors don't want to see companies with debt or at least very early stage companies with any kind of debt because it could complicate things uh and create some issues for for them down the road the company doesn't materialize so those are some important characteristics for for Founders to consider when taking debt or over Equity but I like how you specify it around you there must be a very specific application and the ability to support the debt uh with the current business and that's often why most Founders don't qualify for debt in the sense that early stage companies is there's not necessarily clear means to support or and or pay back the debt so let's start talking about different types of debt from your experience when you deal with companies you know not so much the the small you you store down the street kind of thing but more technology oriented businesses that are dealing with software or Hardware what type of debt vehicles or working capital Vehicles do you often see them getting approved for for sure so I think if we take a step back looking at as a borrower what type of facility makes the most sense for your business right would you lend to your business is always a question that we typically ask Founders that we work with um there's a number of different types of financial vehicles that a business might call qualify for but there's some considerations to have before we get to those from a Founders perspective as to what they should pursue right um the first could be speed of funding so different types of financial facilities require different amounts of diligence uh similarly to um you know Equity fundraising there can be really short processes for certain types of facilities there might be slightly longer processes for different types of debt facilities like an a for example right so the first is thinking about well what am I using that capital for and how quickly do I need to take it and spend it right um that could impact the type of facility someone wants to take the second thing that I alluded to before was the expectation of the return on that Capital right what is the purpose of that so let's break it down into maybe a few of the most common types of facilities the first being term loads so a Term Loan is effectively a lump sum of cash provided day one with a specific term to maturity specific fees associated with it and from a Founders perspective specific fees they're paying on that Capital starting day one the money's at the door right so for most Founders they'll consider term loans when there is that very specific use case that they need to get additional capital for these could be Acquisitions it could could be debt consolidation uh it could be some Project based financing or again very specific Investments that that company wants to make that might not have that 500 expectation of return right so term loans are very common um for most businesses that are in the SAS space uh term loans will be looked at from more of a cash based perspective right so if you're a B2B or B C SAS company uh term loans could be really helpful for you because you're getting a fixed repayment you know exactly what money is going out the door each week exactly what the total outstanding balance might be and it's a very I think clear way to take capital and understand what your obligations will be to that lender going forward um so that's pretty common for I think most SAS businesses but there are another a number of other options one of those other options could be a line of credit a line of credit differs from a term loan for the obvious reasons that it's accessible Capital but you don't have to draw maybe the full amount they want and what that does when you're a Founder is allows you to only take what's required maybe in that 30day spread at a time if you look at a line of credit versus a Term Loan again with a Term Loan you're taking that full amount day one you're paying interest on that day one and you might not spend that $100,000 of the term loan till day 45 right but you've incurred the cost of that capital for the first 45 days of the facility whereas with the line of credit you only have to take uh the money that you need to spend then and that moment and typically what that means is that your financing fees over the course of year should be lower right you're taking the capital that you need as you need it and you can be a little bit more flexible in terms of the use cases just because that money is more flexible so if there's a really well performing marketing campaign that you want to invest more money into well you have the successful money right you can go ahead and really juice that to get the return in that moment as opposed to considering it as a larger sort of financing raise like you would a turn on so um that could be a really good option I think for Founders that are looking for a little bit more comfort in the cash flow a little bit more comfort in their obligations to maybe use that money um but even within both of those you might see secured or unsecured financing okay so with a Term Loan security can vary and this is a really important thing for Founders to remember right if you put your lender hat on as a Founder the number one question that every letter is going to have is do I have confidence that I can recoup this capital okay so how does a lender do that well they do that with a few things but one of those is collateral so on a Term Loan there are different types of collateral there are for example secured financing which could be an a an a is an asset based loan which operates as a Term Loan uh fix her payment structure fix payment amounts but the collateral for that loan could be a little bit different so when you look at a SAS company if they're looking to maybe raise a little bit more than they could purely on cash flow they might look to include IP as an asset that the lender has the rights to in the event that there's a default right I want to you right there I want to talk about that because yeah asset B based loans uh ABS in particular for technology companies and um you know so when you talk about IP this be specific so you don't actually have physical inventory uh in some of these cases and that's often what abls are for is like more e-commerce Brands things of that sort how does one value the IP to then get a loan against it how's that done yeah so it it can be challenging right um the question is what is the true value of that IP and also what is a lender willing to loan against that so for example you're a software business and you've invested $20 million into your platform and you say well look the IP that we've the capital that we've invested in this is $20 million it's unlikely that A lender is going to go ahead and say yep I value that IP similarly because in the event of a default that lender needs to find maybe a buyer for that IP right that lender is not going to go sit there with the IP on their balance sheet and they'll be okay with maybe a loan not being repaid right so they have to go find a buyer for it which means they're going to take and expect you to take maybe a discount on the amount that they're willing to loan against that IP value so if you again say that your IP is worth 20 million well they might say hey look we're only going to advance or provide you 10 million of a facility against that 20 million in collateral because there's always a bit of a fluctuation in how someone actually appraises the value of that IP is there a formal IP valuation that was part of maybe a recent acquisition that there's a firm number around or is it a little bit more of a finger in the as to what that I be worth right so you might look at maybe an internal value of that IP or you might try to get a third party to do an appraisal of that IP but when you're in technology can be really hard because you're building something that maybe doesn't exist right so there aren't similarly comps for what that IP should be worth um so it takes a little bit more how often do you see deals get done for like say a tech company or software company based on IP or having their IP collateralized yeah so the short is it's it's more challenging so it's less frequent I think you need to typically be a slightly larger company you need to be in a better cash position where IP could be part of the package but it won't be the full package for the the low right or for the facility so you'll typically see this for more series a BC companies that have had really obvious values of that IP through previous raises and how other investors would value that IP justified by an equity race right so I think if you're a SAS founder and you're in that preed seed stage but you maybe don't have other assets that could be buckled in like for example AR right you have some really large contracts um payments from larger tech companies that are buying your software you could use as collateral great that would be factored into an IP based a but if you're on the smaller side you're likely going to be looking more at those cash based uh facilities even if you're in SAS just because it'll be really hard for a lender to Value the IP of a company maybe doing around $100,000 a month versus the IP of a company doing 100 million a month yeah that's why I wanted to bring it up is just to set expectations for Founders is you albeit these are tools in the toolbox but they apply to certain types of companies at certain stages and it's important to get an education on you know what actually is attainable for you so you we talked about term loans we talked about lines of credit we talked about how they could be either secured or you unsecured uh so you know no assets backing it so if you default they're screwed essentially to in terms of cin back um so let's talk about Venture debt and how that might be a factor here can you walk the audience through what Venture debt is and how it works absolutely so Venture debt is primarily a debt vehicle that is in some capacity tied to an equity rise there's two major scenarios for when a company would be eligible for Venture debt the first is that they are in the process of raising an equity route so Venture debt uh and the lenders in Venture debt are often very tied at to hip with the VCS and the equity investors at a company so they're willing to for example provide maybe $10 million in Venture debt to a company that's raising 20 million in equity because they understand that if that company runs into cash flow issues those VCS are in as much of a a bind as the Venture debt provider right if there needs to be more money put into the company they have a much better expectation that that founder can go out and raise additional Equity from those VCS so typically what we'll see Venture debt on is again one of the two you're raising Equity now or you have an equity facility that is closing and Venture debt could be tied off the back of that as another way to increase the capital availability for a Founder the second still revolving around a raise could be something like a bridge facility right and a bridge facility similarly would be tied to the expectation of a raise happening often times in the Venture space companies are burning they're burning to grow they're spending on growth but they might be from a cash flow perspective burning a little bit of money each month right so on the second side if you're looking at a bridge facility the types of questions that EV ventured at providers going to ask are mainly going to be questions around what that future rage needs to look like right if they provide a bridge round how much runway do you have how much runway do you have currently how much does it extend your Runway by they provide you venture debt and what happens if that round does or doesn't or closes in a longer term than what's anticipated right how can that Venture debt lender be confident in their investment right and returning that Capital back to them so again there's one of two primary ways but for most folks they'll look at Venture debt traditionally from what we see as a way to buy time to close an equity round and if that's the scenario in which you're looking for Venture debt can be really challenging to get it on the terms that you want at the rates that you want with the covenants that you want as opposed to taking it just after or in the process of when you're raising Equity as well so I'd say those are the two primary ways that we see that one would be probably more of a positive indicator and the second would be one that probably incurs a little bit more risk for the lender and also for your business and your ownership in that business if if get delayed or don't close it all right so it's it's two different types of I think General Venture de facilities that we often see yeah and I often see Venture dead deals get done you know from obviously they have to be usually Venture investors involved and and often the VCS will bring the debt provider to the table and and why to consider it as a Founder it's really extension of Runway you know less dilution so basically you get you know maybe 50% more Capital so if you're raising a $10 million round you might be able to get five million Venture debt so that brings you total to 15 million but you're not taking any dilution on that extra five so obviously it's treated more like a term load in most cases and and one thing we'll get into later in terms of the complexities of how these deals can actually get done the covenants and various different things but uh to simplify you know call it a three-year term you know whatever interest rate uh but you get this extension of Runway that uh you know often a lot of VCS love because they just don't have to take that hit and uh and dilution you get that extra you know couple bucks to to swing so exactly and and one other thing on that side is the consideration of who those VCS are if you're a business that is going and getting Equity financing from a tier one tier 2 VC to your point they'll have people that they might want you to work with on the Venture net side but if you've gone and raised friends and family rounds or other things and that where you're pursuing your Equity rounds from your options for Venture de would not be the same as if a tier one or tier two with Deep Pockets and uh that's done a lot of DD is the one providing you that Equity so the other thing to keep in mind is exactly where the equity dollars might be coming from because that definitely impacts the types of debt deals that you get and especially if you'd be qualified for Venture debt at all right um so just something to be mindful of when you're looking at the equity side how that might Venture de going forward yeah that's I think crucial to understand so uh so you got you basically have to have real institutional money behind you to Warrant Venture debt as a solution uh and that's why they call Venture debt uh so let's talk about I would say one of the easiest forms of capital to get but sometimes often a you know kind of a poison pill if misused so let's talk about Revenue based financing what is it and what are founders doing with it sure so Revenue based financing is effectively another form of what's called a merchant cash advance so the structure of the facility includes effectively you as a Founder selling the rights to Future Revenue to A lender with the addition of a fee that that lender applies and the way that they typically work is a lender will say look we know that you're going to have inconsistent Revenue right um we know that certain weeks or days are going to be better or worse for you than others so the pros of Revenue based financing are that the repayment is tied to the amount of Revenue that you're collecting so let's say someone offers you a $500,000 Revenue based Finance facility and that is at what they would say is a 10% rev that means that you're going to repay that lender 10 cent on every dollar of Revenue that you generate up until you've repaid $500,000 plus whatever their fee might be right so as opposed to a term loan or something that's more structured where hey you know maybe I have to repay $25,000 each week the positives of RBF Revenue based financing are that on those slower weeks when maybe the cash isn't coming in at the same rate the expectation and the repayment that you have to make to A lender is going to to coincide with the volatility in your own Revenue so it can be a little bit easier and a little bit uh more comfortable for borrowers because they know hey I don't have that $25,000 payment this week revenue is down so the payment's only $10,000 right but on the flip side if you have a really good week a really good month then that payment might increase so it provides I think Founders a little bit more flexibility in terms of their cash flow because it is tied to revenue um as opposed to a term Lo but similarly I think it's worth calling out that Founders can end up in a bit of what I would call a cycle with RBF right where next thing you know you know I need another $500,000 but I've only maybe repaid 200,000 of the first RBF facility I had right so now I have what's called stacking and stacking is a bit no no when it comes to RBF lenders but often times Founders are in a position where look they say I need to go find another RBF facility right so now I'm giving 10% of my Revenue to lender a I'm giving 10% of my Revenue to lender Fe and the next three four five months for me it's going to be really hard because my n operating uh margin might be 20% right so now I have no extra available cash that I'm saving or spending on anything else I'm in a bit of a cycle as to paying these you know these folks back so I think on our F it's really important to think about like how you're spending that money right um what is the actual purpose of it is it to increase growth is it for something that's you know a temporary capital need but pushes maybe the can two three months down the line and then you're going to be back in the same spot or how would that affect the other facilities that you might find some more flexibility in with like a line of credit right will you have these same options in the future if you end up stacking some of these rbfs so I think it's just it could be extremely beneficial if they're used in the right way but I think a lot of Founders are ending up in this trap where they're taking the one two three four and then they're not saving any money because they're paying so much of that cash flow back to these lenders yeah I see this happen to Founders all the time it's tragic specifically in anything e-commerce related because it's so accessible it's heavily marketed to Founders as quick easy cash like stripe you can click a button and boom you got like whatever 10% of your total revenue just has cash right there in your pocket uh do whatever you want but what Founders don't realize is i'llbe it that's easy quick cash might solve a temporary problem they fall into that trap of the stacking and they don't realize that they are now if they don't really grasp their unit economics and their financials and their cash flows they soon realize that they're taking debt to pay debt and the moment that happens it's it's game over uh it becomes incredibly diff difficult to get out of that mess it becomes impossible to grow because you can't invest in growth uh you won't be able to get any more debt and no invest you know Equity investor really wants to come in and bail you out in that situation so I often tell Founders like if you have a clear growth initiative so you have a very profitable CAC you know LTV to CAC Ratio or quick uh CA payback uh for marketing or you have like that like you said a one-time expense uh that you just need a quick cover and then uh you're good then RBF can be quick and easy know to run a process you can get the cash now uh and now there's there's millions of lenders out there that have more bespoke offerings that are more tailored to what you might need so before you take that quick um you know stripe PayPal you know whatever uh thing that's marketed to you shop around there there's a lot of lenders that offer similar terms but more favorable uh than what you might get on those platforms so it takes a little bit of effort but you know chop around see what might be out there and then last just make sure you're going to be growing out of that debt you know if you haven't hit product Market fit this is probably one of the worst Capital choices you can make uh they will absolutely Crush you so just you know be advised it's just very it's a tricky vehicle like to understand the payback period it's like oh it's a 10% Revenue but modeling that out you know how that impacts your net operating margin your cash flow spending a little bit of time before you hit that accept button uh is is a wise choice to make so I always like to you know educate Founders in that front yeah and I think making sure that again you're investing in the repeatable aspects of the business with RBF right I wouldn't recommend using RBF for brand new Investments that you don't know if are going to be fruitful or not right you want to be spending that on um you know things that you have a really good understanding to your point of those unit economics around right if I spend a dollar on Google ads I'm going to get $3 back uh in Revenue right um versus hey we have this new product we're going to want to build it could be really good for us it also might be a DB right so is that the type of facility that's tied to cash flow that you want to be using for an investment in something that's a little less repeatable or obvious probably not um but again it's it's one of those things that you really have to sit down and consider because it is a varying percentage of you know cash right Mak in a month it is it is less consistent it is a little harder to plan around um so just making sure you're investing that and the things that you know that work I think are really critical when it comes to RBF yeah no I completely agree and so we covered term loans lines of credit uh RBF ventured debt are there other type of vehicles that you see out there for debt that more this type of audience would run across or be useful yeah I think one of the things that we're seeing a lot more of in um Tech in general as well as sass is the value of the contracts that someone has right so we've talked about ABS in the sense that if a business has obvious assets real estate um maybe IP uh inventory you can put instructural facilities fairly quickly around um we talked about merchant cash advances or RBF uh that are a little bit more tied to cash as the collateral and cash flow and that credit worthiness of a business in order to secure but one of the things we're seeing more commonly with some of these businesses on the tech base especially those that have varying repayment structures and maybe are selling some Hardware as well as Tech is finding a way to Value the AR right so we're seeing a lot more of those AR lines of credit whereby if you have you know net 90 days on uh sales with Facebook or um some other providers that are purchasing your software products and there's a contract to back that future Revenue you can get effectively what's called a line of credit tied to the AR right so A lender might look at you and say hey look you have $10 million in contracts we'll give you up to 80% of that as a line because we know that that 10 million is with really good buyers uh it's with people that we can underwrite and say we're very confident that your customers are actually going to pay you right so the things to consider there are how healthy is your AR so they'll want to look at AR aging reports is your AR current is six million of that 10 million 90 days past due right um are there considerations that they would have with your ability to collect but if you're really good at collecting your Revenue lenders will look at these again contracts and say look I'll lend you against these contracts and I think when you get to a will billing or uh you know different payment timelines uh or customer payment terms that can be really interesting especially if you're again billing up front for the year as an example and you know that someone's tied to maybe a fiveyear contract with you right um so that would be another one that I would say is is relatively interesting if you are doing uh or holding let's say over a million in N AR at a given time yeah and so we're now talking a little bit about the next topic that I wanted to go into which is how to get this debt you know it's one thing to now know that there might be an option for you that is non-dilutive can help you with specific projects but how would a Founder prepare themselves to secure debt what are some of the common check boxes that a company should have ready to secure debt so I think with any business looking for debt um certainly start with that question which is would I give this debt to myself right ask yourself that and look at it objectively if there's reasons why you wouldn't give yourself a $500,000 Term Loan figure out what those are right is it because you're holding too little cash is it because you have a lot of client concentration so if one of those clients goes your revenue is dipping by 50% um are other considerations that if you were on the other side of the table you would have when it comes to actually going through and saying am I ready for debt lenders are going to look at different Financial products and different business sizes with a little bit of a different qu right so firstly is what is the capital being spent on right um every lender is going to want to have an idea of how you're spending that money if it's you want to take out 5008 uh 500 a grand to give yourself uh 500k in dividends it's unlikely that A lender is going to be on the same page as you right so what is the use of that capital and is it something that you spent money on before some of the other things that I would certainly consider before going out to raise uh debt is the leverage right are you in a good position to get the offer that you want these markets change really quickly cost of capital that you'll see change really quickly by a lot of it is TI back to your risk as a business especially on cash flow based loans so if you have four or five different lenders in there that are all taking a piece of the pying now you're going to be in a challenging position so first is can you clean up your debt sack do you have a good understanding of their debt stack and that schedule of payments is is it something that you have a grasp on that you can share with the lender right so I would start there is what does it look like today from a debt perspective second is what is the impact of you taking that debt so you're saying you want another $100,000 in debt maybe you have zero outstanding maybe you have a few hundred thousand doesn't really matter the point is what happens when you take on that additional debt because that's what the lenders is going to be asking themselves can you afford that debt right if someone gives you $100,000 on a 12 mon term do the historical numbers say that you could have afforded that or does it say come month seven you're going to be out of money right so have a thought about again on the other side of the table What A lender is going to look at right because that might affect the terms that you would see when you go out to raise debt I think the other really important thing to think about is debt investors are not looking really at the future projections and the future opportunity like an equity investors investors going to sit back and say look I know these guys are doing a million dollar a year right now we think they can do 500 million in five years right a debt investor is going to look at it and say the proof in the putting with these folks right um oftentimes on the debt side I think Founders try to pitch to debt in investors like they're an equity investor but that debt investor has a limited upside they have a lot of downside right um unlike the equity investors so so first thing is thinking like like a lender where are you actually going to be at throughout the course of this facility and is it enough to get by or you going to end up going to look to out more in the future right and how's that going to affect their ability to get repaid so I'd start there Leverage is kind of that larger point the other thing to consider from a a metric perspective is what's called uh the dcsr or DC uh dscr so that service coverage ratio right um which is effectively your net operating income over your total debt service so you want to be able to show that you have more cash coming in then cash coming out and rep payments effectively right so check on what that number is because if that dscr is over one you're going to be looked at a little bit more favorable meaning that you can afford the repayments to these lenders so let's let's talk about de dead service cover ratio should a Founder be looking at their epid line in their p&l should they be looking at their cash flow statement in terms of net cash change how would they look at determining that the the actual Debt Service cover ratio so I think it would depend on the type of facility and the term of the facility that you're looking at if you're looking at a short-term MCA that is likely going to be anywhere from maybe a three to n month term then I would go back and look at my last three to nine months and say and over the course of that term how much cash did I receive uh how much cash went out the door to repayments right um could I have afforded if I had taken that loan three months ago the rep payments and still maintained a positive dscr right um so I think tie it to the term but also certainly lenders will start to look at profitability and Eva or net income on larger fac facilities and let's break it up into two buckets let's say for most businesses if you doing under let's say $300,000 a month in Revenue you are likely not going to get Venture debt or an A you are likely going to get a cash based one which means that the only metrics and most important things are whether or not you're profitable or you can afford the debt right anything else you can look into to more ratios as facilities get larger and a little bit more creative and structured but generally speaking if you're a smaller business you're going to be taking a l based on C so looking at exactly how that Debt Service ratio impacts your business historically how it might impact your business if you take this debt is also something that I think Founders should have a good grasp on because they're not necessarily Forward Thinking uh and planning that facility out um because a lot of the times these these debt rounds are going to be a little more rea active than proactive right so I say just planning that out as far ahead as you can could give you a lot more comfort in actually making those rep payments and not having to be something that you you're stressing out every day as a Founder quick plug for Founders looking for an edge raising 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BC to get started and if you leave a comment on this video down below with your compy 's name and the problem you're trying to solve you'll be inured to win a free coaching session with me okay that's it just comment down below now let's get back to the show so you gave a really good Benchmark there if you're under 300K this is your option if you're over 300K look at these options what other kind of rules of thumb or benchmarks should a Founder consider that puts them in a different camp for different products what would be some of the kind of lessons there for sure so if we were to split it between MCAS which will likely be shorter terms and higher cost of capital to where everyone ultimately wants to get to which could be a Community Bank CLI right or a bank facility or a more senior facility which will have longer repayment terms and probably a lower cost Capital um there's a few things uh at a very high level that you would want to have in order to start spending your time on what you could arguably say is a you know a better long-term facility for a business right the first is profitability unlike maybe four or five years ago um when money was flying at the door to all these Founders all day long and they were burning it and maybe blowing up and doing really well or going to zero um you know folks right now are really interested in seeing profitability and comfort in the fact that your business will be here throughout the course of of the term right so the first is are you actually profitable right when we look at net income not just in the last month for the last two months but over the last year on your 2023 corporate tax returns were you truly a profitable business the second thing is the asset levels so generally speaking if you have accounts receivable A lender will provide you a facility up to maybe 85% of your average AR as part ofil so you have a million dollars and a letter says I'll give you 850 Grand wi against that um great the second is inventory right uh if you're an Ecom or you're retail typically you'll get anywhere from 50 to 60% of your inventory value towards your facility is that the retail value or the cost of goods value yeah so typically it's the cost of goods value what that value is internally with with the business but depending on the type of business whether you're a wholesaler whether you're D Toc um how you're selling it and what that uh even that inventory aging might look at uh there's a lot of different factors that A lender might consider when they try to determine that value but if you were to take what's on your Ballance sheet today what that inventory line item is and say hey 50% of this goes towards a facility and what's called not lending base for this how quickly can effectively I get to over a million dollars in a in a lending base which mean 80% on AR 50% on inventory by cash balance um you know a number of these other factors how quick can you get to a million in a lending base once you get there the Box opens up and you can start to look at larger facilities you can look at likely better lower costs of capital better Covenants um less restrictions on how you may use those funds as well as obviously going to the Community Banks and getting something that's likely a little bit more efficient so I think in short if you're under 300,000 in monthly Revenue you're likely looking at some sort of cash-based facility whereas once you're getting a little bit above that the revenue is consistent and you have the assets to collateralize a larger facility you kind of get to that next stage of well now I'm not doing three four five month you know RBF deals I'm looking for a two threee term facility all right so it puts you in a different ballpark once you get that asset value and that repent so I want to play some scenarios out I think this will help the audience understand where they might fall so we're going to look at not so good good better best as kind of the the ranking metrics and and just quickly side off what they would actually end up getting so ultimately everyone wants to know like am I going to get my 3% interest rate like I got to my house it's like no all right let's just knock that off the table that's gone it's never come back and it was never for really business loans as it was but I think it'd be great to kind of say all right for a company in a not so good situation you know here's what the cost of capital in terms might look like you know for a great company that's super profitable and you know you know running smooth and blah blah blah what does their cost of capital look like in terms so I want to go through and present a couple examples and I want you to tell me you know what you think what you're seeing in the market with the deals you're getting done right now as of you know Q4 2024 so after a recent uh rate decrease so let's go with not so good so a company with choppy Revenue that is looking for a small amount of capital to solve you know whatever problem they're they're facing uh but there's subm million in revenue and uh qu of borderline you know Break Even but mostly not profitable yet uh what types of options would be available to them and at what rates sure so doing a little less than a million in Revenue they would probably get 80 to 85,000 in a term facility maybe 60,000 on a line of credit and the term of that would probably be in the range of six to nine months uh 9 months at best from an alternative lender the cost of capital for that business would probably be in the range of a 15 to 25% interest rate and the payments on that are likely going to be more common in that sort of daily to weekly range gotcha so call 15 20 25% and the less good you look the higher the rate so let's go to like a decent company so company that's growing not profitable but growing steadily you know revenues maybe you know around a million or like between a million 5 million but showing steady reliable growth but still you know not profitable what options would be on the table for them sure so company that has growing revenue is likely going to be able to get a slightly larger multiple on that average revenue so if they're doing 100K a month they might actually be able to get up to maybe 150 on that facility their term length will increase in size as you move to these other lenders probably around that 9 to maybe 15 month range now with the cost of capital likely being closer to that sort of 18 to 20% of interest rate now so you remove the upside uh or the larger costs there and you're likely going to be more confident in that sort of 18 to 20% range gotcha now similar scenario but Venture back with maybe a tier 2 tier one VC how's it change so yeah so at that point once you have that additional Capital uh from the equity investors and that thought that more Capital might be available the average monthly Revenue multiple that you could get is likely going to be significantly higher so 100K a month business might be able to get 300 to 500k in Venture debt and the rates on Venture debt are usually in that 13 to 16% APR range with terms that might range up to 24 months on average so it's a pretty substantial difference from a company that was bootstrapped in the cost of capital that they get versus someone that's Venture backed with you know notable Venture firm so maybe that first company got um friends and family Angels that's you know they're going to be paying 18 20% uh whereas a venture backed you know institutional investors are going to get much cheaper cost of capital so that's something that I want our audience to really pay attention to in terms of what aable to them all right so let's talk about a really good company uh that is profitable growing uh but doesn't have any your hard asset so-call a software company what uh what options are on the table for them sure so a company at that sort of range now that is profitable is likely going to be able to get again a further multiple on that average monthly Revenue if it's subscription so call it again the 3 to 500,000 in capital usually at 3 to five ta their annual recurring Revenue their rates are also going to be significantly lower so this is when you might be able to get private credit facilities in that sort of 8 to 12% APR range with terms extending up to three or four years maybe even with interest only payment uh interest only periods as well yeah so that's a massive difference so pays to be profitable your cost of debt goes down the the risk to the lender goes down substantially and it's you know you're rewarded with a much lower interest rate and so how like give me a profile of someone that's going to get that juicy sweet and low interest rate from a Community Bank what characteristics would they have to have to have because everyone wants that number but I want to show what that bar is to get qualified for of tier one bank or a Community Bank for you know business loan sure so I think when it comes to that it's not as much going to be purely based on the the assets as opposed to um the business model and the profitability ideally from inception right um I think banks are more interested in funding businesses they're not going to have to worry about and they're willing to price that accordingly so the first thing I would say is if your goal is to get to that sort of sweetart facility as quick as possible is absolutely focus on profitability profitability is going to set you up for that far more than just growth at all costs that would be sort of the first side the second is don't become overly inundated with short-term Deb for the point of maybe short-term goals right I think just being strategic about the growth that you have and again planning this over the courses of years to get to your goals rather than just siging to be here in three months where Founders typically make Po Bing decisions um I think that would also be critical but generally speaking I'd always recommend that you go and and even have that conversation with your Community Bank see where they're at what they think of your business have that conversation with them they're going to be more than happy to and then focus on profitability and making sure that your business will be around in five six seven years and the bank won't have to be worried about you not being here in three four five months so I'm really glad you touched on something here that I was gonna kind of as we start to wrap up the conversation here we talk all about numbers profitability factors and multiples but what we don't talk about and what actually ends up getting a deal done is trust when it comes to not a transactional you know provider like a stripe or PayPal or something like that when you're actually taking money from a person or an institution that is making a human decision there is a substantial amount of relationship building and trust that goes into getting and receiving a loan with favorable terms there's plenty of people that are do transactional loans out there that you know have super high interest rates and whatnot but when it comes to you getting a real deal done uh that is highly favorable uh I would say you know building those relationships as early as you can similar to what it is with raising Equity uh you know build those relationships early have those people in your pocket you know so that when you actually need the money or want to go through the process you have those relationships there which you know if you you have a local community bank just go talk to someone go sit down at the desk and you learn what they offer and what they have or you know call someone that you know can get you introduced to the right you know parties that will put you in the right room with the right types of lenders because that's something that you know you mentioned about what boundless does Kyle in terms of uh putting you know not chasing the wrong lender because if you're trying to get if you're an unprofitable startup and you're going to whatever City Bank you know where you have your checkings account you're probably not going to get what you're looking for uh there's specialty providers out there that and lenders that service these types of companies it's a matter of making sure you find the right one um so you know quick plug if you want help from myself or or Kyle just go to deb. thunder. BC it's a quick form you can fill out and we'll be able to help you get into the right direction of who you should be talking to as well as potentially helping you package up all the materials which is something we didn't talk about today there's not enough time but uh you building up your your your debt package in your data room to to be optimized and ready to quickly get debt from the right people and making sure you're talking to the right uh partners that can actually fund you that all said Kyle it's been an absolute pleasure having you on the show what would be the best way for for people to learn more about you or boundless yeah for sure if people are interested in learning a little bit more about what boundless does uh you can visit our website at www.get bound. and uh fill a form there even start your profile see who you might match to um and we're certainly happy to have conversations with with businesses and help educate them on the types of financing that might be best for them perfect Kyle thank you for being on the show we'll make sure to include all the the links down and the the notes below uh it's been an absolute pleasure thanks for joining us today awesome thank you for having me Jason appreciate it thank you for watching today's episode as a reminder I'm your host Jason Kirby I built and sold multiple companies with over 135 million in transactions as either a Founder operator investor across multiple Industries I'm currently the managing director and founder of thunder. BC where we help companies and Founders at all stages navigate what capital to raise and who to raise it from and help improve company's odds of raising Capital if you need help reach out to us at help. under. BC if you like Today's Show please share with your friends give us a like or comment down below and as as a reminder this show is published weekly and to get notified new episodes and our newsletter be sure to go to our website at join. thunder. BC and if you sign up today I'll send you a few freebies on how to negotiate a term sheet how to get a free list of relevant BCS and much more that's it no more Shameless plugs thank you and see you next week