What type of debt to choose after crossing the Series A bar?

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Fundraising is an essential element for start-ups. A common dilemma faced by founders is choosing between debt financing and equity financing while raising funds.

Debt Financing vs. Equity Financing

At a fundamental level, debt financing refers to the raising of funds vis-à-vis debt. Raising funds via debt has its fair share of pros and cons. Startups raise funds through debt financing from investors with the assurance of repayment with additional interest. As long as a person’s property remains intact, many assets may be at stake as collateral.

Equity financing, however, is quite the opposite. It is the process of raising capital through the sale of shares in the company. The main reason why equity financing is considered risky is that the founder’s or entrepreneur’s control over their startup is compromised. But it is considered a viable option as one can raise a lot more capital through this source. Moreover, the founders are comfortable because, quite simply, there is no repayment pressure.

What to choose and when to choose, however, could be difficult to decipher.

What happens after Series A?

When a company raises Series A funds, it implies that it has reached a crucial moment. Another reason this round of financing is a milestone is that it marks the company’s transition from concept to operation. The real task of running the business and putting all the ideas into action begins after the Series A funding is raised.

Ankit Sharma, director of Trifecta Capital, says the founders aren’t really aware of the benefits of subprime debt. He says, “Debt is something every founder should consider when reaching the Series A stage.”

He adds, “If a company is raising $10 million, they should consider raising a few million through debt.” The main advantage of raising debt capital, he says, is the extended cash rate. The second advantage is that venture capital debt is more dilutive on the equity side, according to Sharma, “The sponsor can save their equity dilutions which they can use to value at a later stage.”

Balance is the action word here.

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