Growth Funding, what does it cost?

Most entrepreneurs need to raise capital at some point to capitalize on their opportunities. You’ve multiple options, but what does growth funding cost you?

The cost of growth funding (also cost of capital) depends on the financial instrument, I will highlight the four most well – known options before diving into a lesser – known solution.

• Bank loans have the lowest cost of capital, typically between 1,2x and 1,4x the amount borrowed with fixed interest rates between 2% and 10%, but personal guarantees and negative covenants are the rule rather than the exception. The term is often 5 to 7 years with a fixed repayment schedule.
• Venture debt and mezzanine financing can seem attractive with interest rates generally starting from 10%, but usually it is complimentary to an equity round. Furthermore, equity kickers are common and typically result in a cost of capital that exceeds 2x the amount borrowed. The term tends to be anywhere between 3 to 5 years.
• Convertible loans are one of the most common financial instruments for early – stage startups. If they don’t convert and are repaid at some point, they are an attractive way of financing your business, but as soon as the convert, the cost of capital starts from 1,25x the amount borrowed at the time of conversion (assuming a 20% discount). However, the true cost of capital can only be determined when there is a liquidity event, meaning that convertible loans have a variable cost of capital that moves with your company value. The true cost of capital typically tends to exceed 3x the amount borrowed.
• Raising equity is the most expensive form of financing your growth since you will give up a (uncapped) part of the future value of your company.

Of course, the preferred financial instrument depends on the situation you are in, but always keep in mind that any choice you make may have consequences for future fundraising. Furthermore, there are more “hidden”costs when considering your options: there are transaction costs that can be up to 10% of the investment, governance costs of shareholder meetings, loss of control or loss of ownership and not to forget the time spent on fundraising that can’t be spent on building the business.

In the past 6 years at Capital Mills, I met with a lot of great entrepreneurs who were looking for funding, but who we couldn’t help with our equity offering, that’s why we started offering revenue – based financing as well. Revenue – based financing has a fixed cost of capital that starts from 1,4x the amount borrowed with no strings (like equity kickers or personal guarantees) attached while keeping the other costs (governance, legal, and time spent) to a minimum.

We are always keen to meet with new entrepreneurs so feel free to reach out to us if you want to know more about what revenue – based financing could mean for your company? Or check out our website (https://www.capitalmills.nl/)