Debt funding can be a significant source of capital for startups and emerging businesses.
However, it can be intimidating to consider debt financing as there isn't as much literature and resources available for entrepreneurs as there is for equity funding. The term ‘debt’ is also often viewed negatively due to general misconceptions.
Whether it is a business loan or a line of credit, debt funding can fulfill immediate needs for your business without impacting the captable structure of your company. It often overshadows the fact that debt is an important financial tool for businesses.
At the outset, any entrepreneur considering debt funding should know that the amount raised through debt financing must be returned with a certain interest rate within a specified period. In turn, the control and ownership of your business remain intact and your team can make the decisions that are best for the company.
Here’s a handy checklist to show the business is debt-ready as you explore alternative forms of funding.
Make sure your business is registered
To begin with, it is important to have your business registered to secure debt in compliance with The Companies Act of 2013. Lenders will be hesitant to work with an unregistered business that could face legal challenges or tax issues down the line.
When raising debt, prepare your pitch with clarity on what the business does, its growth so far, and in what ways securing debt can help boost your business. Showcase early wins, like customer acquisition or pilot programs to validate your market potential. It is best to prepare a deck that clearly states all the information about your business.
Keep the numbers ready
Knowing the business numbers is important. One must prepare basic financial statements before trying to secure debt to give lenders a clear idea of where the business stands today.
At a minimum, startups will need a profit and loss statement and a balance sheet to make intangible and hard assets clear to the lender. It also helps to present runway left, burn rate, any outstanding debt, growth projections, and business plans to achieve them. Nothing paints a clearer picture than the use of numbers in business.
Show the business is credit-worthy
The creditworthiness of your business can make or break a debt financing deal. This will be determined through the credit score (also known as commercial score) of a business, which rates a business as a candidate to receive a loan based on past financial behavior. The applicable score in India is the CIBIL score. To secure debt financing through LV Debt, a business must have a minimum score of 685.
Important documents
Lenders value complete transparency. So, if you’ve decided to raise debt financing for your startup, here are some documents to keep ready.
- KYC documents of the company’s directors or key shareholders
- Company documents like GST certificates, incorporation certificates, bank statements of the business, audit financials, and MIS reports.
Make sure your address mentioned in the registered certificate matches the site of operation as lenders will visit for in-person verification. After that, the lender will sign to disburse the loan amount.
Visit LV Debt to learn more about raising pure-play debt for startups and emerging businesses.
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