The Cannon Classroom – Financing Your Startup
Lunch and Learn Provides Key Financing Tips to Cannon Community
Jake Askew, Cannon Ventures
For companies trying to get off the ground, one of the biggest hurdles normally revolves around acquiring funding. Whether it’s a friends and family round, early seed stage or a full blown series round, finding funding is a difficult process. This augments the importance of entrepreneurs understanding the full arsenal of tools at their disposal.
Late last month, Cannon Ventures and Texas Citizens Bank teamed up to host a Lunch and Learn at The Cannon’s Main Campus to help describe some of the different options for fundraising and explain the evolution of fundraising over the last few years.
This Lunch and Learn consisted of a panel of industry experts from varying backgrounds answering questions from the crowd about fundraising. The session was moderated by Cannon Ventures’ Investment Analyst, Kristen Philips, where she was joined by the below panelists:
Each of the below strategies were highlighted by our panel of experts, offering a number of potential options for entrepreneurs in search of the best fundraising strategy for their company:
Factoring is a form of financing in which a business will sell its accounts receivable (invoices) to a third-party at a discount. This option gives businesses access to immediate funds that can be used to pay for business expenses. This can be an effective option when working with a client who has outstanding invoices and may not be able to pay you back in a timely manner.
Credit Insurance protects the policyholder in the event that a customer becomes insolvent. Insolvency in business can be a more common scenario than many realize, so credit insurance can serve as a solution if a customer isn’t able to pay its debts. Industry standards for credit insurance will often cover ~90% of your accounts receivable.
Contrary to popular belief, SBA loans are not direct loans made by The Small Business Administration to entrepreneurs to grow a small business. Instead, an SBA loan provides a guarantee to banks and authorized SBA lenders for the money they lend to small businesses. If a business owner defaults on a loan, the SBA will promise to pay a portion of the loan back. This can alleviate the risk associated with lending money to small business owners and startups that may not qualify for traditional loans. SBA loans open up lending opportunities to thousands of entrepreneurs. In 2017 alone, SBA approved over 68,000 loans and provided over $30 billion to small businesses.
Evolution of Lending
The panelists also remarked on how the industry of traditional lending has grown over the years and suggested to be wary of new predatory lending entities. When lending entities do not use depository funds, they are not subject to the same level of regulation that more traditional establishments like banks do. Because of this, predatory lenders can offer large amounts of capital quickly but lock founders into unsustainable interest rates and mechanisms that can trap clients into long-term agreements.
It is important for founders to do their homework and understand the terms whenever you are accepting a loan regardless of how established they may seem, or your need for capital.
Crowdfunding is a relatively new phenomenon that has started to become more mainstream after a change of regulation in 2016 by the SEC to allow non-accredited investment in private companies. Crowdfunding is typically done to supplement efforts to an offline fundraise and a way to both market your opportunity to a wider base as well as directly raise funds. These platforms offer the flexibility of either a straight equity raise or a convertible note (to find out when a convertible note might be right for you, please check out our article on the subject HERE).
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