July 13, 2022
Is Pipe a loan?
If you’re looking for non-dilutive financing for your business, loans and alternative financing like Pipe can both be sound options. To make the best decision, it’s important to understand how they stack up in terms of impacting your finances, how fast you can access funding, and your cost of capital.
Flexibility is also a key piece of the puzzle. Using Pipe to pull forward your recurring revenue streams allows you to leverage a powerful asset—your recurring revenue—to capitalize your business without the restrictive terms of a loan.
Let’s take a look at how Pipe and loans compare, and what might work best for you.
Advantages of loans
Loans are simple cash transactions to be paid back with interest. They’re generally non-dilutive and can provide you with capital in a fairly straightforward way. They’re also accessible for founders almost everywhere, unlike equity financing which can be harder to tap into if you’re outside VC hubs like Silicon Valley, or major cities like Los Angeles and New York.
Digging in a little deeper, taking on debt in the form of a loan can be a positive signal to the market. Why? Because it shows that a company is both deemed creditworthy by the lender and pursuing growth opportunities. Loans can also help you keep your weighted average cost of capital (WACC) in check, which can increase your valuation and lower your risk profile for stakeholders.
Disadvantages of loans
Despite their benefits, there are some big drawbacks to loans that can be tough for your company as you scale. Generic repayment terms are tailored to the lender—not you, the borrower. The high cost of capital and slow approval process are also factors to keep in mind. Not to mention the restrictive covenants and warrants that can act like a ball and chain on your business. (More on that in a minute.)
How Pipe compares
Bottom line up front? Trading your recurring revenue on Pipe for up-front capital may offer similar accounting benefits to a loan (check with your accountant!)—but with a lot more flexibility and speed.
How fast do you need capital?
Today’s markets move fast—and if you want to compete, you need to be nimble. This means you need a cash position that allows you to take quick action on agile strategic decisions. If you see the right opportunity to grow your business, you don’t want a lack of liquidity to hold you back—you want to be in a position to go ahead and take the leap.
Traditional debt products—like startup loans, SBA loans, and business loans—can’t often provide that speed and agility. Loans usually require a lengthy and manual financial due diligence process, which can make your funding process take three to six weeks or more. It’s an important and responsible step, but it feels like a lifetime when you’re watching your cash balance deplete and your competition gain the upper hand because they had enough cash to move right away.
Pipe helps you move at a different pace. By connecting securely to your financial systems, we’re able to fully assess your finances in a fraction of the time. Unlike a loan qualification process—which is manual and slow-moving—Pipe’s process is automated, algorithm-driven, and fast. You’ll know how much capital you can access within about 24 hours, not several weeks, and can access it right away once you have your trading limit. Moving forward, Piping additional revenue is as simple as selecting the balance you’d like to use and clicking “Trade”.
→ The takeaway? Pipe and loans can both provide working capital without dilution—but Pipe can do so much faster, exactly when you need it. With Pipe, all you have to do is complete your sign up, connect your systems, and you’ll have a trading limit accessible in as few as 24 hours. Loans often take three to six weeks or even longer to come through.
Covenants, warrants, and restrictions
Maybe the most substantial consideration with loans is restrictions. Loans come with conditions designed to protect the lender. Fair enough—but these can hurt your financial agility and flexibility and can even put dilution back on the table. This is serious, impactful stuff that’s often in the fine print, so let’s take a closer look at how it works.
The first of these protections is covenants. Covenants are conditions that restrict your financial behaviors in the interest of the lender. They can restrict you from borrowing more money, selling certain assets, or allowing certain financial ratios to pass a given threshold. If your goal is to be agile, responsive, and in control of your business’s financial future, external constraints around how you get or spend money can leave you with your hands tied. (Pipe doesn’t come with any covenants.)
Covenants also come with heavy-weight reporting requirements—to the point that many companies have to hire staff just to manage these extensive processes. Since Pipe is securely connected to your financial systems, there’s no need to do those manual monthly or quarterly reports required to service a loan. And that means time, money, and energy saved for you and your company.
Warrant coverage, also known as an “equity kicker,” is another consideration. Warrants give the lender the right to a set amount of stock in your company at a predetermined price. If the value of your stock goes up, so does the value of what you’ve given away and the likelihood the lender will exercise those warrants. This can seriously dilute your ownership and the value of your stock, impacting founders, investors, and employees in the process.
Warrants are more common with venture debt and provide protection to the lender or investor should you default or fall behind on repayments, and an upside for them if your company grows and your share prices increase. This means that in good or bad times, you could find yourself giving up equity in your business when it wasn’t part of the plan.
With Pipe, there are no warrants or covenants and very minimal restrictions on your company. Pipe exists to give founders back the power when it comes to growing their businesses on their own terms: You’re free to make the financing decisions that work best for you.
→ The takeaway? With Pipe, you can skip the risks and restrictions of warrants and covenants and protect your ownership interest. Pipe’s automated integration with your business means no need for tedious reporting requirements. You can run your business on your own terms.
What about reducing your cost of capital?
Another area where Pipe and loans diverge is the cost of capital—which can have a significant impact on you and your business.
Business loans come with interest rates and fees inherent to the traditional banking process. Pipe isn't a lender, so fees are minimal and interest is non-existent.
Pipe is a trading platform that gives you direct access to the capital markets. This means Pipe is able to provide you with cash up front by anonymously matching your company with institutional investors who bid directly on your recurring revenue streams, at an average of .92 to .98 cents on the dollar (or .92 to .98 pence on the pound). This keeps your cost of capital low and frees up your cash for additional investment in your business. (We’ll take a deeper look at how Pipe impacts cash flow next.)
→ The takeaway? Pipe gives you access to capital with more flexibility than a loan, at the best possible price. Because Pipe isn’t a lender, there’s no cost of capital to pass on to you. Instead, Pipe’s platform connects you directly and anonymously to institutional investors who are willing to bid on your recurring revenues when you want, with bid prices typically improving the more you trade.
Let’s talk about cash flow
A major pain point when taking on debt and using loans to finance a company is the impersonal nature of repayment terms. Traditional repayment terms can put pressure on your cash flow—sometimes, at just the wrong moment. (Plus, when you have a loan with variable rates, it might work in your favor today—but hit you where it hurts tomorrow.)
Loan repayment terms are generally tailored to the lender, not to the timing of your cash flow. Not only can this strain your finances in the short term, but it can lead to cycles of borrowing, playing catch up, and even falling prey to predatory lending schemes. These can all damage the health of your business and leave you in a difficult financial position.
With Pipe, cash flow is factored into the repayment process. You’ll pay back what you pulled forward, based on timing of your recurring revenue streams—so that it really works with your business cycle.
→ The takeaway? By connecting with Pipe, you can avoid the cash flow bind often caused by servicing debt. Pipe’s payback terms factor your cash flow into repayment to keep things manageable for you—not to meet a lender’s requirements.
Can Pipe and debt work together?
Absolutely. Pipe can be a complement to debt (including loans like business loans, venture debt, or lines of credit) as well as equity, and can be layered into your bootstrapping strategy. We know that founders need as much flexibility as possible to build the right capital stack—so Pipe is designed to work happily along with, or in place of, other financing options. The goal is always to help you grow your company on your own terms, whatever those terms might be.
Why choose Pipe?
Pipe is an alternative financing option that provides similar benefits to a loan without the drawbacks. You can use Pipe to access the cash you need, when you need it, without the restrictions and costs of loans. Whether you choose Pipe as a standalone option or part of your capital stack, it can help you tap into the flexibility and speed you need to grow and scale your company on your terms.
This post was originally published in November 2021 and updated in July 2022.
Disclaimer: Pipe and its affiliates don't provide financial, tax, legal, or accounting advice. What you're reading has been prepared for knowledge-sharing and informational purposes only. Please consult your financial and legal advisors to determine what transactions and decisions are right for you and your business.