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Luke Voiles

In today's fast-paced world, convenience is no longer a luxury but an expectation. This extends beyond our personal lives and directly impacts how businesses operate. As a result, 

 has experienced significant growth, offering small to mid-size business owners quick access to capital inside of the software they already use for day-to-day operations.

 (ISVs) have a unique opportunity in this space to offer their customers more access to financial products, building a lending business presents formidable challenges. 

The Rise of Vertical Payments and Industry-Specific Software

The ascent of vertical payments is an ongoing trend, offering comprehensive software tools that seamlessly integrate with business operations. Vertical-specific platforms like Toast have emerged as leading examples, providing restaurateurs with a one-stop solution.

This trend is expected to continue, leading to more all-encompassing operating systems that simplify business management and

By integrating financial services seamlessly into their platform, software companies can unlock numerous benefits.

One advantage is the potential to significantly increase Gross Payment Volume (GPV). With embedded financing, software companies can provide their merchants with easy 

, empowering them to make larger purchases or invest in essential upgrades without straining their 

This increased purchasing power not only leads to higher transaction volumes but also cultivates stronger relationships with merchants, ultimately driving up GPV and bolstering the financial health of the ISV itself. 

By offering embedded financing, software companies also position themselves as indispensable partners, seamlessly integrated into their merchants' operations. As a result, merchants are more likely to choose and remain loyal to the software platform that not only meets their payment needs but also helps them manage their finances effectively.

By becoming an even more essential part of their business, serving both operational and financial needs, software companies can enhance customer retention and gain a competitive edge in the market.

Navigating the Challenges of Embedded Finance 

Building a lending business is harder than it may look, and several crucial requirements must be met. Obviously, you need access to the capital you’ll lend, but getting that capital and making the economics work requires that you clear at least four major hurdles.

You need a frictionless way to acquire quality customers at a low cost, and access to consistent, standardized data sets for risk underwriting.

These first two are the easiest for ISVs, as they already have a customer base and extensive data about them. The other two hurdles will likely take an ISV far outside of its wheelhouse and can lead to a quick death for an in-house embedded offering.

Once you have the customers and the data, you need reliable risk models with a proven track record.

On top of that, you’ll need efficient, automated end-to-end operations that allow you to run your lending program with thin margins while still coming out with a profit. That can be very tough to achieve when financing isn’t your core focus. 

If any of these four components is off the mark, you’ll either be unable to access the capital you need to offer embedded lending, or you’ll launch a short-lived offering that takes you away from your core business and can’t keep itself afloat.

Fortunately, there’s an alternative that allows you to leverage your customer, data, and deep industry knowledge, without taking on unrealistic financial challenges or untenable risk. 

Leveraging Fintech and Collaborative Opportunities 

Given the hurdles we’ve just mentioned, it’s easy to see how challenging it is to add small business lending to your platform.

Fortunately, you don’t have to do it alone. By partnering with fintech firms that specialize in connecting businesses to capital through technology, vertical ISVs can make the most of their deep industry knowledge and data to serve their customers even better. 

An embedded capital partner can automate the process, harnessing real-time data with as little as six months of history, in contrast to the two years of financials typically needed by banks.

It can also greatly reduce your risks, allowing you to benefit from increased revenue and deeper customer relationships without carrying loans on your balance sheet. 

allows for operational efficiency, technology-driven underwriting, compliance and regulatory solutions, for a turnkey embedded financing product.

The rise of embedded finance presents a compelling opportunity for software companies to expand their offerings and empower small businesses.

However, building a sustainable lending business necessitates careful consideration, expertise, and strategic partnerships.

By embracing collaboration with fintech firms, software companies can leverage their deep industry knowledge while providing embedded financial services as a seamless off-the-shelf product.

This collaboration between vertical software solutions and fintech unlocks unprecedented value, delivering enhanced financial access to small businesses.

Discover the challenges and benefits of building embedded finance solutions and the value of partnering with fintech experts. 

Should you outsource of build an embedded financing product?

Should vertical software companies develop in-house embedded financing or partner?

If you’re a small business owner, you probably already know that securing funding can be a major challenge. Without funding, you lose out on sales and opportunities for growth. If this resonates with you, it's time to consider small business loans.

Small business loans play a crucial role in providing entrepreneurs with the necessary financing to start or expand their businesses in ways that may otherwise be out of reach. Whether you're aiming to fuel 

, explore new ventures, or conquer immediate challenges, small business loans can be a game-changing solution.

In this article, we delve into the world of small business loans, covering everything you need to know:

Let’s dive in! (You won't fall, we’ll be holding your hands).

Before going into the pros and cons of small business loans, we’ll begin by defining them. In its most basic form, a small business loan is a financial product designed to help small and medium-sized enterprises (SMEs) access capital to fund their businesses.

Small business loans serve as a lifeline for entrepreneurs, providing them with the capital needed to fund new projects, weather financial storms, acquire equipment, hire staff, purchase inventory, or expand operations.

They come in various forms, ranging from traditional loans to specialized financing products like 

, and invoice financing. The primary advantage of these loans is that they provide companies with access to resources they would not otherwise have. By offering capital to SMEs, small business loans enable them to seize new opportunities, create jobs, and contribute to local economies.

They can be obtained from various sources, including traditional banks, credit unions, online lenders, and 

. It's important to note, however, that each type of lender may have different eligibility criteria, loan terms, interest rates, and associated fees.

Small business loans come in various forms, each with its own advantages and considerations. Here are some of the most common types:

These are traditional bank loans with a fixed repayment term, interest rate, and monthly payment. They are typically used for large projects or investments, such as equipment purchases or real estate acquisitions. Term loans can come from traditional banks, credit unions, or online lenders, and they often require collateral or a personal guarantee.

A business line of credit is a flexible loan option for small businesses. It allows you to quickly access a set amount of money whenever needed. Basically, they provide businesses with ongoing access to capital. They are suitable for managing short-term cash flow needs or unexpected expenses. Lines of credit can come from traditional banks, credit unions, or online lenders, and they often require collateral or a personal guarantee. Unlike a term loan, you only pay interest on the money you use. After a certain period, usually five years, you can no longer withdraw funds and must start repaying the loan.

 and are available through traditional lenders or online lenders. Unlike traditional loans, SBA loans have lower eligibility requirements and longer repayment terms of up to 25 years. SBA loans can be used for a variety of purposes, including working capital, equipment purchases, and real estate acquisition. There are different types of SBA loans, each offering unique benefits and maximum loan limits. However, SBA loans generally range between $30,000 and $5 million. 

 MCA is a type of business financing in which a lender provides a lump sum of cash to a company up front. Unlike traditional loans, repayment is linked to the business's future credit card or debit card sales.

With each sale made and customer payment received through cards, a portion of that sale is directed to the lender to repay the advance. This repayment arrangement continues until the total advance, along with any agreed-upon fees, is fully paid off. It's important to note that the repayment timeline can vary based on the business's sales volume.

 is specifically designed to assist businesses in purchasing various types of equipment, including machinery, electronics, fixtures, and technology.

For small businesses, having the right equipment is essential for day-to-day operations. Without the necessary tools, companies may face decreased productivity, increased costs, and an inability to compete.

Beyond operational efficiency, it helps small businesses expand services, reach new customers, and increase revenue. Financing equipment preserves cash flow, allows access to new technology, and maintains competitiveness. Equipment financing offers tax benefits by deducting interest paid on loans,  reducing the overall tax burden and freeing up cash flow for your business.

The loan amount for equipment financing is typically based on the value of the item and the down payment provided by the borrower. They often come with more flexible repayment terms than traditional loans. SMEs can obtain equipment financing from traditional banks, credit unions, or online lenders, and the equipment itself may serve as collateral.

Assessing your needs–do you need a business loan?

Before applying for a small business loan, it's important to evaluate your company’s needs and determine what type of loan would be the best fit. This seems obvious enough, except it isn’t.

As a general rule, remember two important points before taking a loan for your business: first, only take a loan when it helps you seize opportunities to increase revenue and grow your business. Second, avoid relying on a loan to keep a failing business afloat. Here are some factors to consider when assessing your funding needs:

The first step in assessing your business’s needs is to determine how much money you require. Consider whether you are seeking funding for a new project, expanding your product line, or covering current expenses.

It's important to assess both your short-term and long-term financial goals when determining the loan amount. Striking the right balance is important—borrowing too little may leave you short on funds while borrowing too much can lead to unnecessary debt burdens.

One way to determine the loan amount is to create a detailed budget that outlines all of your expenses and revenue projections. This will give you a clear picture of your financial needs and help you make an informed decision about the loan amount.

Knowing what you want to accomplish with your loan is just as important as knowing how much cash you require. Are you looking to expand your business, cover expenses during a slow season, or finance a specific project?

For instance, if you're looking to expand your business, you may need a more significant loan amount and a longer repayment term. On the other hand, if you're looking to cover expenses during a slow season, a short-term loan may be more appropriate.

It's also important to consider the potential return on investment (ROI) of the loan. Will the loan help you generate more revenue or increase your profitability? If so, it may be worth borrowing the money.

Ultimately, identifying the purpose of the loan will help you choose the right loan product and ensure that you're using the funds wisely.

What you need to apply for a business loan; preparing essential documents

Applying for a business loan can be an exciting step towards achieving your goals. Before applying for a small business loan, it's essential to prepare yourself and your business by gathering all the necessary documents to support your application. This step can help you overcome common hurdles and improve your chances of getting financing. Here's a simple guide to help you prepare:

Make sure your financial statements are accurate, up-to-date, and prepared by a certified public accountant (CPA). If you don't have a CPA, consider hiring one to prepare your financial statements. A CPA can also provide valuable advice on improving your financial performance and increasing your chances of getting approved for a loan.

If you have any outstanding tax liabilities, make sure to address them before applying for a loan. Lenders will be hesitant to approve your loan if you have any unresolved tax issues. Make sure to have your business tax returns for the past few years ready. This helps lenders assess your financial stability and verify your income.

Include a comprehensive market analysis in your plan, highlighting your target customers' needs and how your offerings meet them. Add a detailed financial plan projecting revenue, expenses, and profits for the next few years, along with a break-even analysis. A well-crafted plan showcases your vision, strategy, and growth potential. It helps lenders grasp your business and shows them how you'll maximize the loan. Your accountant can help you prepare these as well.

Being prepared can help streamline the loan application process and increase your chances of getting approved for a loan. Make sure to evaluate your options carefully, weigh the benefits and drawbacks of each type of loan, and choose the one that best aligns with your needs and goals.

Certainly, all this is a lot to take in. However, remember, we're here to guide you through the process and answer any questions you may have.

Lenders assess your loan application based on various factors. Familiarizing yourself with these factors can help you choose the appropriate loan and lender. Here are some aspects to consider:

It's no surprise that lenders rely on your past credit performance to assess your ability to handle new credit. They primarily consider two key factors: your personal credit score and your business credit score. These scores provide valuable insights into your creditworthiness and help lenders gauge the level of risk involved in extending credit to you.

So how do you get that high credit score lenders want? Nobody knows the exact algorithms that determine your 

 (except FICO, of course), but we know the factors: your payment history, how much you owe, how much new credit you have, how long you’ve had credit, your debt-to-limit ratio, and the diversity of your credit history.

Improve those factors to boost your score–make timely payments, reduce the debt-to-income ratio, and limit credit inquiries. Regularly monitor your score and correct any errors.

To improve your business credit, start by making sure your business has a name, legal entity, and an 

Also, ensure you're paying bills on time, maintaining a low debt-to-income ratio, and building a positive credit history. You should also open a business-specific bank account and get a D-U-N-S number. As you get credit and loans, pay them off on time. Then watch your credit score climb.

Maintaining a good credit standing shows your financial responsibility and enhances the likelihood of securing the necessary financing for your business. If your credit history needs improvement, don't worry—we can provide guidance on how to enhance your credit profile.

When applying for a business loan, know that lenders often prefer working with businesses that have a solid track record of operating for a certain period, typically around six months to a year. This showcases your business's stability and proven ability to effectively manage day-to-day operations.

As a general rule, the longer you have been operating, the greater the opportunities for obtaining financing. While most lenders want historical performance to evaluate, there are specialized loan options tailored for startups that are worth exploring.

Lenders will carefully evaluate your business's revenue and 

 to assess its financial health. While specific requirements may vary, having a consistent revenue stream and demonstrating profitability can significantly increase your chances of qualifying for a loan. Showing that your business generates a steady income highlights its potential for growth and success.

, they want to understand more than just your business's revenue. Positive cash flow indicates that your business generates sufficient income to cover its expenses and loan repayments. Demonstrating a healthy cash flow reassures lenders of your ability to manage loan obligations, thus enhancing your eligibility.

The debt-to-income ratio, also known as your debt load, is a key factor that lenders consider. This ratio compares your total debts to your income. A lower ratio signifies a healthier financial position and can improve your eligibility for a business loan. Maintaining manageable debt relative to your income showcases your responsible handling of financial obligations.

In certain cases, lenders may take into account the industry in which your business operates. Some industries may be perceived as having higher risks due to market volatility or other factors. Additionally, offering collateral, such as property or equipment, can provide added security for the loan and potentially enhance your eligibility. 

Small businesses are the backbone of the economy, and they play a vital role in job creation and economic growth. However, starting or expanding a small business can be a daunting task, especially when it comes to financing. That's where small business loans come in. Small business loans offer a variety of benefits to entrepreneurs, including:

Access to capital is one of the primary benefits of small business loans. As any entrepreneur knows, starting or expanding a business requires a significant up-front investment. Small business loans provide companies with the capital they need to get off the ground, purchase inventory, or invest in new technology. This is particularly valuable for businesses that are just starting out or looking to grow.

Compared to traditional loans, small business loans often come with more flexible terms. These may include longer repayment periods and reduced monthly payments. Such flexibility helps businesses manage their cash flow and avoid overextension. Additionally, some lenders will offer small business loans with no prepayment penalty, allowing companies to pay off their debt early and save on interest costs.

Find out how small business loans can help you grow, the different types of loans that could be right for you, and how to qualify.

Find out how small business loans can help you grow, the different types of loans that could be right for you, and how to qualify for a small business loan. 

All you need you need to know about small business loans

A comprehensive guide to small business loans

A Comprehensive Guide to Small Business Loans

, there are plenty of options—but they often come with a price. Equity financing, for example, dilutes the company's ownership and can leave founders with less control over their business. Traditional debt financing often comes with restrictive covenants and warrants and may not even be available to many young companies. But what if there was a way to raise funds without giving up ownership or taking on restrictive traditional debt? Enter non-dilutive financing.

Non-Dilutive financing (also called non-dilutive capital or non-dilutive funding) is a type of financing that allows startups and mature companies to raise funds without sacrificing equity. There are several types of non-dilutive financing, including:

 are also non-dilutive, but are typically a much slower and more restrictive option than alternative financing. Debt financing can 

 dilutive if it comes with warrant coverage or an equity kicker giving the lender the right to stock in the future.

 is the process of raising capital by selling company shares. By selling shares, companies can raise money for short-term needs or long-term projects that promote growth. Equity financing is effectively selling ownership in a company in return for cash.

For a startup to grow into a successful, mature company, it often needs several rounds of financing. Companies typically attract different kinds of investors at different stages, depending on the balance of risk and return at that growth stage.

Equity financing has advantages in certain situations:

The existing shareholders' ownership percentage decreases as additional stock shares are issued. While dilution of shares may be required for a business to obtain financing, there are several possible risks that the company should take into account before moving forward. 

Let’s explore some of the cons of diluting equity:

While equity financing is one way a business can access capital, there are also several potential risks that the company should carefully examine. Companies should assess the benefits and drawbacks before taking on dilutive financing. They should also consult carefully with their financial experts to make the best choice for their company and shareholders.

In a bear market, when the price of shares drops, securing equity funding can be difficult. Investors may be less eager to put money into a business during a market downturn because they’re likely to be risk-averse and have lower expectations for the company's future success. 

Second, issuing new shares in a bear market may need to be done at a discount compared to what it could fetch in a bull market. Raising a “down round” can be discouraging and leads to less much-needed capital with a bigger impact on ownership.

Last but not least, if the company issues new shares during a down market, it may be seen as a sign of weakness or financial difficulty, further lowering investor confidence and the demand for the company's stock. As a result, the company may need to issue even more shares to raise the same amount of money. This is where non-dilutive financing comes in. 

Advantages of non-dilutive funding for startups

Non-dilutive financing offers several advantages over traditional fundraising methods: 

Can you use non-dilutive capital in conjunction with equity financing?

Yes! Using both offers numerous benefits. For example, suppose you’re using non-dilutive financing and want to raise an equity round. Non-dilutive capital can give you time to raise a round the right way, since you won’t be scrambling for the cash. That means you can be choosier about who invests in your company and how much equity you’re willing to give away.

Non-dilutive financing from Pipe offers flexibility and speed to help you keep control of your growing company. Pipe can be used on its own or stacked together with other financing options like equity to help you grow on your terms. 

Non-dilutive financing for SaaS businesses and beyond

Pipe’s modern capital platform gives you access to non-dilutive financing by turning predictable future revenue into up-front capital. No need to spend months pitching investors or offer steep discounts to improve your short-term cash flow. Instead, you can capitalize on the valuable asset that is your predictable revenue and use it to grow your business faster.

Learn how non-dilutive financing can protect your equity.

Learn about non-dilutive financing as an alternative to equity financing that allows companies to raise funds without sacrificing equity or control. 

Non-dilutive financing: The future of fundraising

When it comes to growth financing for your startup, there are a variety of options available. Each has its own benefits and drawbacks, so it's important to understand your options and choose the right type of growth financing for your business. 

In this post, we'll explore the different types of growth financing, discuss the pros and cons of each option, and help you decide which one is right for your business.

Growth financing refers to capital invested in a company in order to fuel its growth. It’s essential for startups as it allows them to scale their businesses and bring their products or services to market. 

It can come in the form of equity financing, when investors provide funds in exchange for an ownership stake in the company, or debt financing, when a lender provides funds that must be repaid with interest. 

There are also non-dilutive growth financing options like Pipe’s recurring revenue financing, which allows you to trade future revenue streams for up-front growth capital. Whatever the source, the common theme is the use of funds to finance the growth stage of your company. 

There are a number of benefits associated with growth funding for businesses. 

The primary benefit is that it can help businesses scale operations and enter new markets faster than they could without external financing, leading to increased profits and improved competitiveness. 

The goal of this expansion is to reach more customers and grow revenue and market share, but it takes time to start bringing in that revenue. Growth financing gives businesses the up-front capital to make the jump to the next level.

For example, if a company is looking to expand into a new geographic area, they may need funds to hire additional staff, launch marketing campaigns targeting that new area, and possibly open a new office. All of this will take place before bringing in new revenue from the area, and growth financing makes this possible. 

Growth financing can also be used to help fund day-to-day operating costs, so founders can focus their attention on the challenges of growing without worrying as much about short-term cash flow.

Are there any risks associated with taking on growth funding?

As with any business venture, there are some risks associated with taking on growth funding. 

One of the main risks is that businesses may struggle to repay the investment if their growth objectives are unsuccessful. This could lead to financial difficulties and potentially put the business at risk. Businesses should be in a healthy position and deploy their funds wisely in a way that will generate predictable revenue increases.

Also, businesses need to be aware of the terms of any funding agreement, as this can have a significant impact on future cash flow and profitability. 

Why is it important to choose the right type of growth capital?

Choosing the right type of growth funding is critical for any company. 

 can provide the capital necessary to scale quickly, but it can also lead to problems down the road if investors want to take the company in a different direction than the founders. Even if the majority of equity is still held by the founders, dilution can have serious impacts on future profits. 

Debt financing is often a more sustainable option, as it doesn't dilute ownership and gives business owners more control, but it may not provide as much capital up front. Companies in the early stages, or those without many physical assets like SaaS companies, may have 

trouble getting traditional debt financing

Ultimately, it's important to weigh the pros and cons of each option carefully before making a decision. Consider how much capital you need, how quickly you need it, how it will be used, and what you’re willing to accept in terms of dilution, restrictions, and warrant coverage. What are the different types of growth funding?

As mentioned earlier, there are many different types of growth financing available. Equity financing can provide a large amount of capital, but the dilution can potentially make it very expensive in the long run. 

For companies that don’t have predictable revenue (or are pre-revenue) equity may be the only option. Equity investors are looking for future value and profits, rather than immediate cash flow, so they don’t expect repayment on the financing right away like other alternatives.

Loans are typically a non-dilutive option (although some do come with warrants), but they can be restrictive and many lenders only work with certain types of businesses. Products like revenue-based financing can also fit under the umbrella of loans, although they are packaged according to the revenue of the company. If your revenue grows, your payments will go up as well, but you’ll also be protected against dips in revenue with a shrinking monthly payment. 

These types of debt financing are non-dilutive, but you’ll need to be in a position to make regular repayments. Lenders will want to see proof of revenue and cash flow sufficient to support a payment schedule. In some cases, lenders also have covenants specifying exactly how you can spend the capital, which can be very restrictive.

How can businesses access growth funding?

There are a number of ways to access growth funding. One option is to approach traditional financial institutions such as banks or 

. However, these options can be difficult to secure, particularly for small businesses. Another option is to utilize government grants or loans specifically designed to support business growth.

Finally, startup founders can access growth funding via modern capital platforms like 

. Pipe helps businesses secure growth funding through a fast, frictionless platform. After signing up, companies can securely connect their bank accounts, accounting software, and billing manager. Pipe provides a trading limit, based on the health of the company’s finances, allowing them to exchange future revenue streams for up-front growth capital. 

You can trade as much, or as little of your revenue as you want, within your trading limit. There is no obligation to trade, no warrant coverage, and zero dilution. Your trading limit is based solely on your company’s health.

How can businesses make the most of their growth funding opportunities?

There are a number of ways in which businesses can make the most of their growth funding opportunities. It’s important to have a clear and concise business plan which outlines the company’s growth strategy. This will give potential investors a better understanding of how their investment will be used, and help to convince them to provide funding. 

Will you use the funds to hire and expand your team?

Will you scale up your marketing efforts to acquire new customers?

Will you bring a new product or service to market?

Whether or not your financing source requires a written plan, it’s important to know how your funding will be used to make sure you get a solid return and can manage repayment schedules and return profiles.

Financing is a critical part of any business, and there are a variety of different ways to finance your company. Growth financing can provide you with the capital you need to grow rapidly while staying healthy. There are both pros and cons to growth financing, so you need to weigh the benefits against the risks before making a decision.

Whether you’re looking to increase sales, hire new employees, or expand into new markets, growth financing can help you grow your company faster.

If you're ready to scale your business and consider growth financing, be sure to 

When it comes to growth financing for your startup, there are a variety of options available. Each has its own benefits and drawbacks.

Learn what growth financing means and what it can mean for your growing business.  

See how growth financing can help scale your business faster

The definitive guide to growth financing

As a founder or business owner, you’ve got more than enough on your plate running the day-to-day operations of your business. Financing future growth—whether with equity, debt, or 

—adds an extra layer of complexity that many founders aren’t prepared for. 

 are out there, but coming to the table unprepared can quickly lead to problems getting approved. 

Let’s take a closer look at the most common reasons founders get denied financing and what you can do to fix those problems.  Whether you need financing right away or are planning for the future—which we highly recommend to anyone not actively seeking funds—keep reading. 

The most common reasons startups fail to get financing

Whether your startup is profitable and needs funding to scale faster, or you’re still pre-profit and need outside funding to operate, a denial can be devastating. Traditional bank loans and equity rounds can take a long time and significant energy. If they don’t result in the financing you need, you may be running out of time to try again.

Here are some key reasons why startups struggle to get the financing they need:

It's a measure of how many months you can go without an outside injection of capital. This is one of the key financial terms for startups to understand, because lenders and investor want to know your company will last. This applies to any company that’s not yet profitable, which can take years and is never achieved by over half of startups. 

Runway is how much cash you have divided by your burn rate (your net loss of cash each month).

 can make investors worry about your operational efficiency and signal potential problems in the near future. Lenders and investors are hesitant to finance companies with low runway, out of concern the company may not have enough cash cushion to survive a few bad months. Those who will finance a company with low runway often do so at a much higher cost of capital to offset the risk for themselves. 

For an operationally focused or technical founder, bookkeeping and accounting may be the bain of their existence. All those spreadsheets can look like about as much fun as cleaning out the garage or organizing your closet. This is why so many put it off (along with cleaning out the garage and organizing their closet). For many startups, which have yet to put together an accounting team or hire a CFO, it can get put off even longer.

But timely, accurate accounting is an absolute necessity when you want to secure financing.  Your accounting records are the easiest way for lenders and investors to assess the health and risk level of your company.  Even if your company is in great health, if your accounting is a mess—or you haven't 

 in a few months—lenders and investors won't know. For a financier, it can feel like choosing what's behind door number three.

A startup’s balance sheet is crucial when looking for financing because it shows lenders and investors what you own and what you owe. Cash on hand, existing loans, and other obligations all live on the balance sheet, and these are all important for financial approvals. 

Updating and closing the books is also an important part of having an accurate balance sheet, because many of the adjusting journal entries that are made during the monthly closing process will impact balance sheet accounts. If these aren’t up to date, anyone reviewing the financial statements will have to make the most conservative reasonable assumptions about what those numbers are.

It may be even more important to have an accurate P&L for startups looking to get financed. That’s because a lack of assets on the balance sheet puts even more pressure on a healthy P&L startup companies can use to reflect cash flow, revenue, and expenses. These numbers help potential investors or lenders see your ability to repay as well as the potential for growth in your company (by evaluating things like acquisition costs and profit margins).

One of the most frustrating reasons your startup may struggle to get financing is because it’s, well, a startup. While early-stage equity investors are used to funding brand-new ventures, other forms of financing, like banks, want to see a long history of payments and financial responsibility. While financial 

 is clearly a red flag, many startups are simply too new to have 2-4 years of financial records for a funding application. 

How to improve your chances of getting business funding 

Don’t let the struggles we’ve just mentioned get you down. If you want the best chance of securing financing for your growing business, there’s plenty you can do to increase your chances. 

Banks, equity investors, and alternative financing providers are always looking for companies to finance. But first, they need to ensure those companies are healthy. Here are three steps you can take to maximize your approval odds and reduce your risk profile.

Simply put, cash flow is the measure of cash moving in and out of your company. Cash flow measures only liquid payments, so while it includes things like checks and electronic payments (not only currency), it doesn’t include payments on credit that have yet to be collected. Cash flow is an important measure of a company’s health because a business that makes millions in sales but never collects the cash still can’t pay its bills. 

There’s more than one way to calculate cash flow, but the simplest one (called the direct method) involves subtracting the outflows from the inflows in three areas: operating, investing, and financing. Your cash flow is the sum of all three. It’s also important to know each of these three cash flow numbers separately because you could be losing cash on day-to-day operations and only show a net positive cash flow because of investing activities (like selling equipment) or financing that won’t occur in a typical month.

A lack of cash on hand is a big red flag when you’re looking for financing. It can seem counterintuitive, as the need for cash is one reason you may be looking for financing, but there’s a good reason for it. For example, if you apply for a personal credit card, but you’ve used up most of your currently available credit, you'll be declined. The card company will likely decide you’re living beyond your means and will be a high risk with an extended credit limit. 

The same concept applies to cash on hand and financing. Having no cash cushion can signal to banks and investors that your company is operating with no margin. That’s a big risk if the unexpected comes along. 

Since cash on hand is part of the equation for measuring your runway, you need to have a decent cash balance showing you can operate through a dry spell. You can calculate your burn rate and runway using 

In the above example, you’d likely need to pay down your credit card balances first. As a startup seeking financing, you can improve your chances by tightening your burn rate to save up a cash cushion. You may also strengthen your cash position by seeking friends and family or small-check angel investment first.

A solid cash runway gives you more financial options by showing that your startup can survive to the next funding milestone. Maintaining a certain runway is challenging in tough times, but founders need to know what to shoot for as they secure funding and prune their spending to reduce burn rate.

While many banks and investors use 12-18 months of runway as a standard, it can vary by your industry and the type of financing you’re seeking. Ultimately, the longer your runway, the better off you are when it comes to obtaining capital. A company that has a healthy cushion and sticks to a plan to moderate burn will always be a more attractive financing option, giving you more choices and access to better terms.  

If you’re seeking debt financing, it’s important that your current cash-to-debt ratio is manageable. The cash flow required to service your existing debt will play into your burn rate and impact your ability to service more debt. Lenders will also consider the seniority of your debt and may be hesitant to lend if they’ll be subordinated to more senior debt. 

Issues like runway, cash flow, and burn rate are all important factors to consider when you’re deciding on the type of financing to pursue. While each type has its place, none of them is right for every business in every stage of growth. Next, we’ll take a closer look at the types of financing, and consider which is best for your specific situation.   

Choosing the Right Type of Financing for Your Startup

Now that you have an understanding of why startups may struggle to get financing, how you can prove that your business is healthy, and some of the key financial metrics that lenders and investors look at when deciding whether to extend financing, you need to think about the type of financing that fits your needs. Keep in mind that 

 will have different requirements and be designed for specific stages of the business life cycle.

When it comes to securing financing for your startup, there are a few key steps you can take to improve your chances of getting approved.

Focusing on these three key areas will help you access capital and boost your company's eligibility for growth financing. 

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Pipe Blog

SubscribeGet the best of Pipe's Blog

Finance your Business

Should vertical software companies develop in-house embedded financing or partner?

A comprehensive guide to small business loans

Non-dilutive financing: The future of fundraising

The definitive guide to growth financing

3 ways startups can improve their chances of getting financing

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