The Smart Entrepreneur’s Guide to Debt Financing for Startups

November 8, 2023

Startups and young companies often need robust financing to reach their potential. Entrepreneurs often self-fund a startup through a certain stage. When startups reach the seed stages, where verifiable product-to-market success is shown, valuations verified, and target timelines are set—it’s time for more options!

In this article, New Valley Bank explores various financing options while considering the importance of maintaining equity and control of your business.

Understanding Debt Financing vs Equity Financing

Debt financing involves borrowing money from banks, credit unions, private investors, or other lenders that must be repaid with interest. In contrast, equity financing refers to securing capital in exchange for an ownership percentage in the company. There are pros and cons to each option that should be carefully considered.

With equity financing, you can use capital without the pressure of repayment by giving up a portion of your business. However, maintaining equity in your business by choosing debt financing ensures you can maintain control of the direction of your business.

Advantages of Debt Financing for Startups

Debt financing for startups offers many advantages, particularly tax benefits (deductions for interest expense) and maintaining control of your business. The accessibility of debt is a big advantage for startups because it is easily acquired through traditional means such as bank loans, whereas securing equity investors from private investors and venture capitalists can be very difficult and time consuming. Debt financing can also often be a more affordable option than equity financing, as often the interest expense on borrowings would be less than the anticipated return on equity in the business venture.

Types of Debt Financing Options for Startups

Here are a few of the financing options that may be accessible to startups and young companies:

1. SBA 7(a) Loan Program

This is the Small Business Administration’s primary business loan program for providing financial assistance to small businesses. The loans may be issued to a maximum amount of $5,000,000 and can be used to finance a variety of different projects, including the purchase and installation of new equipment, acquisition of existing businesses, and working capital. Within the SBA 7(a) program there are several different lending products, such as the SBA 7(a) Express program, which entails an expedited application process, albeit with a lower SBA guarantee than the standard SBA 7(a) loan.

2. SBA 7(a) Micro Loan Program

This program lends up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000 and are accessed through specially designated intermediary lenders, which are nonprofit community-based organizations with experience in lending as well as management and technical assistance. It should be noted that New Valley Bank is not a specially designated intermediary lender, but it is an important program that we want to recognize.

3. CDC/504 Loan Program

This is a financing program that is offered by the Small Business Administration to promote business and job growth through the purchase or improvement of real estate, equipment, and other tangible assets. With this program, borrowers must work with a Certified Development Company (CDC) in conjunction with their traditional lender on their application. Loan amounts are typically capped at $5,000,000 and may fund up to 85% or 90% (depending on the situation) of a borrower’s project.

4. Conventional Financing

Conventional financing means borrowing from a financial institution without credit enhancements, such as with no guarantee from the Small Business Administration. Conventional financing is typically limited to established companies with strong operating histories, making it extremely difficult for startups or younger companies to qualify. Conventional financing is often viewed as the “holy grail” of startup financing, as it is very difficult to obtain, and requires a very experienced business owner with significant financial resources and a business with strong collateral and earnings capacity.

It should be noted that every borrower is unique and not all these options will be suitable for every situation. The commercial lending team of New Valley Bank work with borrowers to craft a tailored financing solution that addresses borrower’s individual needs.

Financing for Startups with New Valley Bank and Trust

New Valley Bank has a mission to support savvy entrepreneurs looking to the world of debt financing—an option that offers not only the essential funds for growth but the unique advantage of preserving ownership and control.

Our loan options for startups like yours creates customizable solutions meant to fit your circumstance and future dreams. Ready to get started? Call, text, or reach out online for more information. We are here to help support your business!

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The Smart Entrepreneur’s Guide to Debt Financing for Startups