How much does startup debt actually cost?

Jason Kirby (00:02.003) Hey everyone, welcome back to Fundraising Demystified. Today we're taking a little bit of a turn from our usual episode to focus on an important topic around debt and working capital for technology companies. It's a topic that we haven't really dove into in the past yet. We talk about fundraising all the time. It's usually around equity. This time I wanted to talk about the other type of capital, specifically debt and all the different types of shapes and forms it can come in. And to do that, I wanted to bring in one of our partners that we work with on multiple debt deals, Kyle Rector, president and co-founder of Boundless. Welcome to the show, Kyle (00:43.118) Please surround me, Jason. Jason Kirby (00:44.551) No, I'm excited to have you and join in this conversation and kind of speak to your experience, having done the deals that you've done and get into the actual nuts and bolts of how companies get debt financing and all the different shapes and forms that can come in. Before we do that, I would love for you, Kyle, to just tell everyone a little bit about your background and a little bit about Boundless. Kyle (01:09.974) Sure. So I've been in the debt financing space now for over 10 years. Some of the leading digital lenders in the space and started Boundless roughly two years ago as a way for borrowers and lenders to bridge that gap and understanding the other sort of risk model. Right. What Boundless is, is a capital marketplace that matches businesses to lenders based on that risk criteria so that borrowers aren't out there searching for capital from lenders that may never approve them. It's a bit of a black box, I think, today, just given how quickly this industry moves. So one of the things that we really prioritize is making that capital application process and the actual sourcing of that facility as efficient as possible, just so that founders can kind of get back to what they need to do to grow that business. Just in terms of kind of where we're at as a business, Boundless, again, has been around for two years as a bootstrapped company. We've seen over the last year just over a billion in capital requests now that span the range of your small business capital requirements, $5,000 term loans, all the way up to a few hundred million. And that spans businesses of every industry, every size, every geography, including the US, Canada, UK. and others there. we have a really good understanding across those businesses that we've seen as to what it takes to actually secure funding and how to go about thinking about debt financing as a founder when it comes to your total capital stack and how that can impact your business. Jason Kirby (02:52.615) That's exactly why I brought you on the show is given your depth of experience in this industry, working on hundreds of deals, the tune of billions of dollars in requests. It's really to help us have a productive conversation on helping our audience understand what's available to them, you know, and what would they potentially qualify for. And before we go into the details of this, this episode, if you could just walk our audience through what is debt and in the terms of like, you know, what we're leading into and the different types of debts, but like, what is debt and how does it compare to raising equity? How should founders think about those two options? Kyle (03:34.978) Yeah, for sure. So debt, whether it's business or personal, operates in the same capacity where effectively someone is taking capital from another party with the promise of repaying that capital at a certain point in time. Right. Unlike equity financing, which a investor may receive capital back upon some type of liquidity event, debt is more formatted to specific maturities, terms, repayment structures that give a lender more confidence in them actually being able to recoup that capital in a defined amount of time, unlike potentially equity. So it's a little bit different in terms of the expectations that a lender might have as well as a borrower, as opposed to equity financing. And also the implication that that capital, when taken from a debt investor, should have on the business, right? Typically, I think when you're taking equity capital, you want to be investing that in things that might have a 10, 50, 100 X return on the value of your business, as opposed to debt, which should be a little bit more purpose-driven, project-specific, mainly around things that have a more repeatable or understood expectation of the impact that it'll have on the business. Jason Kirby (05:00.147) And I'm glad you bring that warning. most founders, they think only equity. That's what comes to the most founders' minds when they think about going out and securing capital. And a lot of complain about the dilution. But the benefit of dilution to the cap table is there's no obligation to pay it back. They're betting on you, taking the risk with you in the event that you don't hit a home run. There's no one knocking on your door after you're making you file bankruptcy and pay back their debts and have these really complicated situations. Often why most venture investors don't want to see companies with debt or at least very early stage companies with any kind of debt because it can complicate things and create some issues for them down the road or the company doesn't materialize. So those are some important characteristics for founders to consider when taking debt or over equity. But I like how you specify it around. there must be a very specific application and the ability to support the debt with the current business. And that's often why most founders don't qualify for a debt in the sense that early stage companies is there's not necessarily clear means to support or pay back the debt. let's start talking about different types of debt. And from your experience, when you deal with companies, you know, not so much the small, you store down the street kind of thing, but more technology oriented businesses that are dealing with software or hardware. What type of debt vehicles are working capital vehicle you often see them getting approved for? Kyle (06:40.654) For sure. So I think if we take a step back, looking at as a borrower, what type of facility makes the most sense for your business, right? Would you lend to your business? There's always a question that we typically ask founders that we work with. There's a number of different types of financial vehicles that a business might qualify for, but there's some considerations to have before we get to those. from a founder's perspective as to what they should pursue. The first could be speed of funding. So different types of financial facilities require different amounts of diligence. Similarly to equity fundraising, there can be really short processes for certain types of facilities. There might be slightly longer processes for different types of debt facilities like MABL, for example. So the first is thinking about, well, What am I using that capital for and how quickly do I need to take it and spend it? Right. That could impact the type of facility someone wants to take. The second thing that I alluded to before was the expectation of the return on that capital. Right. What is the purpose of that? So let's break it down into maybe a few of the most common types of facilities. The first being term loans. So a term loan is effectively a lump sum of cash provided day one with a specific term to maturity, specific fees associated with it. And from a founder's perspective, specific fees they're paying on that capital starting day one, the money's out the door, right? So for most founders, they'll consider term loans when there is that very specific use case that they need to get additional capital for. These could be acquisitions, it could be debt consolidation. It could be some project based financing or again, very specific investments that that company wants to make that might not have that 50, 100 X expectation of So term loans are very common. For most businesses that are in the SaaS space, term loans will be worked out from more of a cash based perspective. Right? Kyle (09:02.584) So if you're a B2B or a B2C SaaS company, term loans could be really helpful for you because you're getting a fixed repayment. You know exactly what money is going out the door each week, exactly what the total outstanding balance might be. And it's a very, I think, clear way to take capital and understand what your obligations will be to that lender going forward. So that's pretty common for, I think, most SaaS businesses. But there are another, a number of other options. one of those other options could be a line of credit, right? A line of credit differs from a term loan for the obvious reasons that it's accessible capital, but you don't have to draw maybe the full amount they want. And what that does when you're a founder is allows you to only take what's required, maybe in that 30 day spread at a time. If you look at a line of credit versus term loan, Again, with a term loan, you're taking that full amount day one, you're paying interest on that day one, and you might not spend that hundred thousandth dollar of the term loan till day 45, right? But you've incurred the cost of that capital for the first 45 days of the facility. Whereas with a line of credit, you only have to take the money that you need to spend then in that moment. And typically what that means is that your financing fees over the course of the year should be lower. Right? You're taking the capital that you need as you need it. And you can be a little bit more flexible in terms of the use cases just because that money is more flexible. So if there's a really well performing marketing campaign that you want to invest more money into, well, you have the successful money, right? You can go ahead and really juice that to get the return in that moment, as opposed to considering it as a larger sort of financing, raise like you would a term. So. That could be a really good option. I think for founders that are looking for a little bit more Comfort in the cash flow a little bit more comfort in their obligations to maybe use that money But even within both of those you might see secured or unsecured financing. Okay, so with a term long Security can vary and this is a really important thing for founders to remember right if you put your Kyle (11:31.902) lender hat on as a founder, the number one question that every letter is going to have is do I have confidence that I can recoup this capital? Okay, so how does a lender do that? Well, they do that with a few things, but one of those is collateral. So on a term loan, there are different types of collateral. There are, for example, secured financing, which could be an ABL. An ABL is an asset based loan, which operates as a term loan. Fix her payment structure fixed payment amounts, but the collateral for that loan could be a little bit different So when you look at a SaaS company if they're looking to maybe raise a little bit more than they could purely on cash flow They might look to include IP as an asset that the lender has the rights to in the event that there's a default right and Jason Kirby (12:23.365) I want to interrupt you right there. want to talk about that because yeah, asset based loans, ABLs in particular for technology companies. you know, so when you talk about IP, let's be specific. So you don't actually have physical inventory in some of these cases. And that's often what ABLs are for is like more e-commerce brands, things of that sort. So how does how does one value the IP to then get a loan against it. How's that done? Kyle (12:56.302) Yeah. So it can be challenging, right? The question is what is the true value of that IP and also what is a lender willing to loan against that? So for example, you're a software business and you've invested $20 million into your platform and you say, well, look, the IP that we've been, you the capital that we've been investing in, this is $20 million. It's unlikely that a lender is going to go ahead and say, yep, I value that IP similarly. Because in the event of a default, that lender needs to find maybe a buyer for that IP, right? That lender's not gonna go sit there with the IP on their balance sheet and they'll be okay with maybe a loan not being repaid, right? So they have to go find a buyer for it, which means they're gonna take and expect you to take maybe a discount on the amount that they're willing to loan against that IP value. So if you again say that your IPs worth 20 million, well, they might say, hey, look, we're only gonna advance or provide you. 10 million of a facility against that 20 million in collateral because there's always a bit of a fluctuation in how someone actually appraises the value of that IP. Is there a formal IP valuation that was part of maybe a recent acquisition that there's a firm number around or is it a little bit more of a finger in the air as to what that IP could be worth? Right, so you might look at maybe an internal value of that IP or you might try to get a third party to do appraisal of that IP, but when you're in technology, it can be really hard because you're building something that maybe doesn't exist, right? So there aren't similarly comps for what that IP should be worth. So it takes a little bit more. Jason Kirby (14:34.637) How often do you see deals get done for, like I say, tech company or software company based on IP or having their IP collateralized? Kyle (14:44.192) Yeah. So the short is it's more challenging. So it's less frequent. I think you need to typically be a slightly larger company. You need to be in a better cash position where IP could be part of the package, but it won't be the full package for the below, right. Or for the facility. So you'll typically see this for more series A, B, C companies that have had really obvious values of that IP through previous raises and how other investors would. value that IP justified by an equity raise, right? So I think if you're a SaaS founder and you're in that pre-seed seed stage, but you maybe don't have other assets that could be buckled in, like for example, AR, right? You have some really large contracts, payments from larger tech companies that are buying your software that could be used as collateral. Great, like that would be factored into an IP based ABL. But if you're on the smaller side, you're likely going to be looking more at those cash-based facilities, even if you're in SaaS. Just because it'll be really hard for a lender to value the IP of a company, maybe doing around $100,000 a month, first the IP of a company doing $100 million a month. Jason Kirby (15:58.451) Yeah. And that's why I wanted to bring it up as just to set expectations for founders is, you know, albeit these are tools in the toolbox, but they apply to certain types of companies at certain stages. And it's important to get an education on, you know, what actually is attainable for you. you know, we talked about term loans. We talked about lines of credit. We talked about how they could be either secured or unsecured. So, you know, no assets backing it. So if you default, they're screwed essentially in terms of clawing back. So let's talk about venture debt and how that might be a factor here. Can you walk the audience through what venture debt is and how it works? Kyle (16:38.518) Absolutely. So venture debt is primarily a debt vehicle that is in some capacity tied to an equity raise. There's two major scenarios for when a company would be eligible for venture debt. The first is that they're in the process of raising an equity round. So venture debt and the winners in venture debt are often very tied at the hip with the VCs and the equity investors at a company. So they're willing to, for example, provide maybe $10 million in venture debt to a company that's raising $20 million in equity because they understand that if that company runs into cashflow issues, those VCs are in as much of a bind as the venture debt provider, right? If there needs to be more money put into the company, they have a much better expectation that that founder can go out and raise additional equity from those VCs. So typically what we'll see venture debt on is again, one of the two. You're raising equity now, or you have an equity facility that is closing and venture debt could be tied off the back of that as another way to increase the capital availability for a founder. The second still revolving around a raise could be something like a bridge facility, right? And a bridge facility similarly would be tied to the expectation of a raise happening. Oftentimes. in the venture space, companies are burning, they're burning to grow, they're spending on growth, but they might be from a cashflow perspective, burning a little bit of money each month. Right? So on the second side, if you're looking at a bridge facility, the types of questions that a venture debt provider is going to ask are mainly going to be questions around what that future range needs to look like. Right? If they provide a bridge round, how much runway do you have? How much runway do you have currently? How much does it extend? your runway by if they provide you venture debt and what happens if that round does or doesn't or closes at a longer term than what's anticipated, right? How can that venture debt lender be confident in their investment, right? And returning that capital back to them. So again, there's one of two primary ways, but for most folks, they'll look at venture debt traditionally from what we see as a way to buy time to close an equity round. And Kyle (19:05.664) If that's the scenario in which you're looking for venture debt, it can be really challenging to get it on the terms that you want, at the rates that you want, with the covenants that you want, as opposed to taking it just after or in the process of when you're raising equity as well. So I'd say those are the two primary ways that we see that. One would be probably more of a positive indicator. And the second would be one that probably incurs a little bit more risk for the lender and also for your business. and your ownership in that business if rounds get delayed or don't close at all. So it's two different types of, think, general venture debt facilities that we often see. Jason Kirby (19:45.971) Yeah. And I often see venture debt deals get done, you know, from obviously they have to be usually venture investors involved. And often the VCs will bring the debt provider to the table and why to consider it as a founder. It's really extension of runway, minimal, you know, less dilution. So basically you get, you know, maybe 50 % more capital. So if you're raising a $10 million round, you might be able to get 5 million in venture debt. So that brings you total to 15 million. but you're not taking any dilution on that extra five. So obviously it's treated more like a term loan in most cases. And one thing we'll get into later in terms of the complexities of how these deals can actually get done, the covenants and various different things. to simplify, call it a three-year term, whatever interest rate, but you get this extension of runway that often a lot of VCs love because they just don't have to take that hit and dilution. You get that extra, you couple of blocks to swing. Kyle (20:47.458) Exactly. And one other thing on that side is the consideration of who those VCs are, right? If you're a business that is going and getting equity financing from a tier one, tier two VC, to your point, they'll have people that they might want you to work with on the venture debt side. But if you've gone and raised friends and family rounds or other things, and that's where you're pursuing your equity rounds from, your options for venture debt would not be the same. as if a tier one or tier two with deep pockets and that's done a lot of DD is the one providing you that equity. So the other thing to keep in mind is exactly where the equity dollars might be coming from because that definitely impacts the types of debt deals that you get and especially if you'd be qualified for venture debt at all, right? So just something to be mindful of when you're looking at the equity side, how that might impact venture debt going forward. Jason Kirby (21:43.569) Yeah, that's I think crucial to understand. you basically have to have real institutional money behind you to warrant venture debt as a solution. And that's why they call it venture debt. So let's talk about, I would say, one of the easiest forms of capital to get, but sometimes often a kind of a poison pill if misused. So let's talk about revenue-based financing. What is it and what are founders doing with it? Kyle (22:13.518) Sure, so revenue-based financing is effectively another form of what's called a merchant cash advance. So the structure of the facility includes effectively you as a founder selling the rights to future revenue to a lender with the addition of a fee that that lender applies. And the way that they typically work is a lender will say, we know that you're going to have inconsistent revenue, right? we know that certain weeks or days are going to be better or worse for you than others. So the pros of revenue based financing are that the repayment is tied to the amount of revenue that you're collecting. Right. So let's say someone offers you a $500,000 revenue based finance facility. And that is at what they would say is a 10 % rev shift. That means that you're going to repay that lender. 10 cents on every dollar revenue that you generate up until you've repaid $500,000 plus whatever their fee might be. Right? So as opposed to a term loan or something that's more structured where, you know, maybe I have to repay $25,000 each week. The positives of RBF revenue based financing are that on those slower weeks when maybe the cash isn't coming in at the same rate, the expectation And the repayment that you have to make to a lender is going to coincide with the volatility in your own revenue. So it can be a little bit easier and a little bit more comfortable for borrowers because they know, Hey, I don't have that $25,000 payment this week. Revenue was down. the payment's only $10,000. Right. But on the flip side, if you have a really good week, a really good month, then that payment might increase. It provides, think founders a little bit more flexibility in terms of their cashflow because it is tied to revenue, as opposed to a term loan. But similarly, I think it's worth calling out that founders can end up in a bit of what I would call is a cycle with RBF, right? Where next thing you know, you know, I need another $500,000, but I've only maybe repaid 200,000 of the first RBF facility I had. Right. So now. Kyle (24:34.444) I have what's called stacking and stacking is a big no-no when it comes to RBF lenders. But oftentimes founders are in a position where, look, they say, I need to go find another RBF facility. Right. So now I'm giving 10 % of my revenue to lender A. I'm giving 10 % of my revenue to lender B and the next three, four five months for me, it's going to be really hard because my net operating margin might be 20%. Right. So now I have no. extra available cash that I'm saving or spending on anything else, I'm in a bit of a cycle as to paying these folks back. So I think on RBF, it's really important to think about how you're spending that money. What is the actual purpose of it? Is it to increase growth? Is it for something that's a temporary capital need, but pushes maybe the can two, three months down the line, and then they're going to be back in the same spot? Or how would that affect the other facilities that you might find some more flexibility in with like line of credit. Right? Well, you have the same options in the future if you end up stacking some of these RBFs. So I think it's just, it can be extremely beneficial if they're used in the right way. But I think a lot of founders are ending up in this trap where they're taking one, two, three, four, and then they're not saving any money because they're paying so much of that cash flow back to these lenders. Jason Kirby (25:57.937) Yeah, I see this happen to founders all the time. It's tragic, specifically in anything e-commerce related because it's so accessible. It's heavily marketed to founders as quick, easy cash, like Stripe. can click a button and boom, you got like whatever 10 % of your total revenue just as cash right there in your pocket. Do whatever you want. But what founders don't realize is, albeit that's easy, quick cash might solve a temporary problem. They fall into that trap. of the stacking and they don't realize that they are now, if they don't really grasp their unit economics and their financials and their cash flows, they soon realize that they're taking debt to pay debt. And the moment that happens, it's game over. It becomes incredibly difficult to get out of that mess. It becomes impossible to grow because you can't invest in growth. You won't be able to get any more debt and no equity investor really wants to come in and bail you out in that situation. So I often tell founders, if you have a clear growth initiative, so you have a very profitable LTV to CAC ratio or a quick CAC payback for marketing or you have like a one-time expense. that you just need a quick cover and then you're good. Then RBF can be quick and easy, you to run a process, you can get the cash now. And now there's millions of lenders out there that have more bespoke offerings that are more tailored to what you might need. So before you take that quick, you know, Stripe, PayPal, you know, whatever thing that's marketed to you, shop around. There's a lot of lenders that offer similar terms, but more favorable. then what you might get on those platforms. So it takes a little bit of effort, but you know, shop around and see what it might be out there. then last, just make sure you're to be growing out of that debt. You know, if you haven't hit product market fit, this, this is probably one of the worst capital choices you can make. they will absolutely crush you. just be advised. It's just very, it's a tricky vehicle. Like to understand the payback period. like, it's just 10 % of revenue, but modeling that out. Jason Kirby (28:13.297) you know, how that impacts your net operating margins, your cashflow, know, spending a little bit of time before you hit that accept button is a wise choice to make. So I always like to educate founders on that front. Kyle (28:27.214) Yeah. And I think making sure that again, you're investing in the repeatable aspects of the business with RBF, right? I wouldn't recommend using RBF for brand new investments that you don't know if they're going to be fruitful or not. Right. You want to be spending that on, you know, things that you have a really good understanding to your point of those unit economics around, right? If I spend a dollar on Google ads, I'm going to get $3 back in revenue. Right. versus, Hey, we have this new product we're going to want to build. It could be really good for us. It also might be a dud. Right. So is that the type of facility that's tied to cashflow that you want to be using for an investment in something that's a little less repeatable or obvious? Probably not. but again, it's, one of those things that you really have to sit down and consider because it is a, varying percentage of your. your cash, right? Maybe even a month. is less consistent. It is a little harder to plan around. So just making sure you're investing that in the things that you know that will work, think are really critical when it comes to RBF. Jason Kirby (29:40.595) Yeah, no, I completely agree. And so we covered term loans, lines of credit, RBF, venture debt. Are there any other type of vehicles that you see out there for debt that more of this type of audience would run across or be useful? Kyle (29:58.326) Yeah, I think one of the things that we're seeing a lot more of in tech in general, as well as SaaS is the value of the contracts that someone has. Right? So we've talked about ABLs in the sense that if a business has obvious assets, real estate, maybe IP, inventory, you can put the structure of facilities fairly quickly around. We talked about merchant cash advances. or RBF that are a little bit more tied to cash as the collateral and cash flow and that credit worthiness of the business in order to secure. But one of the things we're seeing more commonly with some of these businesses on the tech space, especially those that have varying repayment structures and maybe are selling some hardware as well as tech is finding a way to value the AR, right? So we're seeing a lot more of those AR lines of credit whereby if you have, you know, 90 days on, sales with Facebook or, some other providers that are purchasing your software or products, and there's a contract to back that future revenue, you can get effectively what's called a line of credit tied to the AR. Right? So a lender might look at you and say, Hey, well, if you have $10 million in contracts, we'll give you up to 80 % of that as a line, because we know that that 10 million is with really good buyers. it's with people that we can underwrite and say, very confident that your customers are actually going to pay you. Right? So some of the things to consider there are how healthy is your AR? So they'll want to look at AR aging reports. Is your AR current? Is 6 million of that 10 million 90 days past due? Right? Are there considerations that they would have with your ability to collect? But if you're really good at collecting your revenue, lenders will look at these contracts and say, look, I'll lend you against these contracts. And I think when you get to annual billing or different repayment timelines, Kyle (32:24.174) or customer payment terms. That can be really interesting, especially if you're again, billing upfront for the year as an example, and you know that someone's tied to maybe a five year contract with you, right? So that would be another one that I would say is relatively interesting if you are doing or holding, let's say over a million in NAR at a given time. Jason Kirby (32:47.451) Yeah. And so we're now talking a little bit about the next topic that I wanted to go into, which is how to get this debt. You know, it's one thing to now know that there might be an option for you that is non-dilutive, can help you with specific projects. But how would a founder prepare themselves to secure debt? What are some of the common checkboxes that a company should have ready to secure debt? Kyle (33:16.332) Yeah, for sure. So I think with any business looking for debt, certainly start with that question, is would I give this debt to myself? Right? Ask yourself that and look at it objectively. If there's reasons why you wouldn't give yourself a $500,000 term loan, figure out what those are. Right? Is it because you're holding too little cash? Is it because you have a lot of client concentration? So if one of those clients goes, your revenue is dipping by 50%. Are there other considerations that if you were on the other side of the table, you would have? Right? When it comes to actually going through and saying, am I ready for debt? Wenders are going to look at different financial products and different business sizes with a little bit of a different plan. So firstly is what is the capital being spent on? Every lender is going to want to have an idea of how you're spending that money. If it's you want to take out 500 grand to give yourself 500k in dividends, it's unlikely that a lender is going to be on the same page as you. So what is the use of that capital and is it something that you spent money on before? Some of the other things that I would certainly consider before going out to raise debt is the leverage. Are you in a good position to get the offer that you want? These markets change really quickly. Cost of capital that you'll see change really quickly, but a lot of it is tied back to your risk as a business, especially on cashflow based loans. So if you have four or five different lenders in there that are all taking a piece of the pie right now, you're going to be in a challenging position. So first is, can you clean up your debt stack? Do you have a good understanding of your debt stack? And that schedule of payments, is it something that you have a grasp on that you can share with the lender? So I would start there, is what does it look like today from a debt perspective? Second is what is the impact of you taking that debt? So you're saying you want another $100,000 in debt, maybe you have zero outstanding, maybe you have a few hundred thousand, doesn't really matter. The point is what happens when you take on that additional debt? Because that's what the lender is going to be asking themselves. Kyle (35:42.702) can you afford that debt, right? If someone gives you $100,000 on a 12-month term loan, do the historical numbers say that you could have afforded that? Or does it say come month seven, you're gonna be out of money, right? So have a thought about, again, on the other side of the table, what a lender's gonna look at, right? Because that might affect the terms that you would see when you go out to raise debt. I think the other really important thing to think about is dead investors are not looking really at the future projections and the future opportunity like an equity investor is. An equity investor is going to sit back and say, look, I know these guys are doing a million dollars a year right now. We think they can do 500 million in five years. A dead investor is going to look at it and say, the proof's in the pudding with these folks, right? Oftentimes on the debt side, think founders try to pitch to debt investors like they're an equity investor, but that debt investor has a limited upside. They have a lot of downside, right? Unlike the equity investor. So first thing is thinking like, like a lender, where are you actually going to be at throughout the course of this facility? And is it enough to get by or are you going to end up going to look to get more in the future? Right. And how's that going to affect their ability to get repaid? So I'd start there. Leverage is kind of that larger point. The other thing to consider from a metric perspective is what's called the DCSR or DSCR. So debt service coverage ratio, right? Which is effectively your net operating income over your total debt service. So you want to be able to show that you have more cash coming in than cash coming out in repayments effectively. So check on what that number is because if that DSCR is over one, you're going to be looked at a little bit more favorable, meaning that you can afford the repayments to these lenders. Jason Kirby (37:50.589) So let's talk about debt service cover ratio. Should a founder be looking at their EBITDA line in their P &L? Should they be looking at their cash flow statement in terms of net cash change? How would they look at determining the actual debt service cover ratio? Kyle (38:10.414) So I think it would depend on the type of facility and the term of the facility that you're looking at. If you're looking at a short term MCA that is likely going to be anywhere from maybe a three to nine month term, then I would go back and look at my last three to nine months and say, over the course of that term, how much cash did I receive? How much cash went out the door to repayments, right? Could I have afforded? if I had taken that loan three months ago, the repayments and still maintained a positive DSCR, right? So I think tie it to the term, but also certainly at lenders will start to look at profitability and EBITDA or net income on larger facilities. And let's break it up into two buckets. Let's say for most businesses, if you're doing under, let's say $300,000 a month in revenue, you are likely not going to get venture debt or an ABL. You are likely going to get the cash based loan, which means that the only metrics and most important things are whether or not you're profitable or you can afford the debt, right? Anything else, you can look into more ratios as facilities get larger and a little bit more creative and structured. But generally speaking, if you're a smaller business, you're going to be taking a loan based on cash flow. So looking at exactly how that debt service ratio impacts your business historically, how it might impact your business if you take this debt, is also something that I think founders should have a good grasp on. Because they're not necessarily forward thinking and planning that facility out. Because a lot of the times these debt rounds are going to be a little more reactive than proactive, right? So I'd say just planning that out as far as you can could give you a lot more comfort in actually making those repayments and not having it be something that that you're stressing out every day on as a founder. Jason Kirby (40:09.395) So you gave a really good benchmark there. If you're under 300k, this is your option. If you're over 300k, I these options. What other kind of rules of thumb or benchmarks should a founder consider that puts them in a different camp for different products? would be some of the kind of lessons there? Kyle (40:28.206) For sure. So if we were to split it between MCAs, which will likely be shorter terms and higher cost of capital to where everyone ultimately wants to go to, which could be a community bank client, right? Or a bank facility or a more senior facility, which will have longer repayment terms and probably a lower cost of capital. There's a few things at a very high level that you would want to have in order to start spending your time. on what you could arguably say is a better long-term facility for a business. The first is profitability. Unlike maybe four or five years ago when money was flying out the door to all these founders all day long and they were burning it and maybe blowing up and doing really well or going to zero, folks right now are really interested in seeing profitability and comfort in the fact that your business will be here. throughout the course of the term. So the first is, are you actually profitable? And when we look at net income, not just in the last month, for the last two months, but over the last year on your 2023 corporate tax returns, were you truly a profitable business? The second thing is the asset levels. So generally speaking, if you have accounts receivable, a lender will provide you a facility up to maybe 85 % of your average AR as part of the facility. So you have the million dollars and a letter says, I'll give you 850 grand live against that. Great. The second is inventory, right? If you're an e-comm or your retail, typically you'll get anywhere from 50 to 60 % of your inventory value towards your facility. Once you start, Jason Kirby (42:22.981) Is that just to be clear, is that the retail value or the cost of goods value? Kyle (42:29.934) Yeah, so typically it's the cost of goods value, what that inventory value is internally with the business. But depending on the type of business, whether you're a wholesaler, whether you're D to C, how you're selling it and what that even that inventory agent might look at, there's a lot of different factors that a lender might consider when they try to determine that value. But if you were to take what's on your balance sheet today, what that inventory line item is and say, hey, 50 % of this goes towards a facility and what's called that lending base for this, how quickly can effectively I get to over a million dollars in a lending base between 80 % on AR, 50 % on inventory, my cash balance, you know, a number of these other factors. How, how quick can you get to a million dollars in a lending base? Once you get there, the box opens up and you can start to look at larger facilities. You can look at likely better lower costs of capital, better covenants, less restrictions on how you may use those funds, as well as obviously going to the community banks and getting something that's likely a little bit more efficient. So I think in short, if you're under 300,000 in monthly revenue, you're likely looking at some sort of cash-based facility. Whereas once you're getting a little bit above that, the revenue is consistent. and you have the assets to collateralize a larger facility, you kind of get to that next stage of, well, now I'm not doing three, four, five month, you know, RVF deals. I'm looking for a two, three year term facility. All right. So it puts you in a different ballpark once you get that asset value and that revenue. Jason Kirby (44:17.629) So want to play some scenarios out. I think this will help the audience understand where they might fall. So we're to look at, you know, not so good, good, better, best as kind of the, ranking metrics and just quickly side off where in the ballpark where they have to be, and just, no, sorry, where they have to be, what they would actually end up getting. So ultimately everyone wants to know like, Kyle (44:44.974) Sure. Jason Kirby (44:46.779) Am I going to get my 3 % interest rate like I got on my house? It's like, no. All right. Let's just knock that off the table. That's gone. It's never come back. And it was never for really business loans as it was. But I think it'd be great to kind of say, all right, for a company in a not so good situation, here's what the cost of capital in terms might look like. For a great company that's super profitable and running smooth and blah, blah, what does their cost of capital look like in terms? I want to go through and present a couple of examples and I want you to tell me what you think, what you're seeing in the market with the deals you're getting done right now as of Q4 2024. So after a rate decrease. So let's go with not so good. So a company with choppy revenue that is looking for a small amount of capital to solve whatever problem they're facing, but there's sub million in revenue. and quite a borderline break even, but mostly not profitable yet. What types of options would be available to them and at what rates? Kyle (45:54.318) Sure, let's say they're not profitable, right? They're averaging roughly 80 to 90K a month in revenue. Typically, founders' expectations should be that for any alternative lender, barring anything crazy on the asset side, their likely amount of capital they can get is going to be probably 0.85 to 1 % of their monthly average revenue, right? So starting from the amount, this type of business would not be able to get 200,000 or 300,000 just objectively from an alternative lender because they would not be able to afford the repayments on that. Right. And that company is going to be in a much worse spot if they take a amount. So the first thing is the term, the amount, right? They'd probably look at up to 1%, maybe a little bit over that if they're growing substantially month over month. but generally speaking, one times the monthly average rate. So that's where I would start. Is that aligned with what that business needs, why they need it, how much they actually need to spend in the next 60 days and not maybe the next year, right? Jason Kirby (47:07.187) So Kyle, Kyle, going to, we're going to cut this part. We're to go back to the question. I want you to just give me like, so just note to the editors, you know, cut, the start of your question and let's start over with your question or with your answer. I want you to just be like, they will probably get close to 85 to a hundred K on these terms. just to kind of, cause I want this to be like chopped into like a short kind of thing that we can like get a bunch of little shorts on this. so I don't want the, you know, the, cause I know you're like, just kind of trying to cover the basis and like give full education, but everyone just wants to, yeah, everyone just wants to just like, tell me how much I can get, you know? so let's not make it lie. So, the, the, I'll tee up the question again, and then we'll start the video from here. so not so good company doing a little less than a million dollars in revenue. What can they get? Kyle (47:42.872) Yeah, I could be choppier. Yeah, that's okay. Kyle (48:05.454) Sure, so doing a little less than a million in revenue, they would probably get $80,000 to $85,000 in a term facility, maybe $60,000 on the line of credit. And the term of that would probably be in the range of six to nine months, nine months at best from an alternative lender. The cost of capital for that business would probably be in the range of a 15 % to 25 % interest rate. and the payments on that are likely going to be more common in that sort daily to weekly range. Jason Kirby (48:40.307) Gotcha. So call it 15%, 25%. The less good you look, the higher the rate. So let's go to a decent company. So company that's growing. Not profitable, but growing steadily. Revenues maybe around a million or between a million and five million, but showing steady, reliable growth, but still not profitable. What options would be on the table for them? Kyle (49:07.31) Sure, so a company that has growing revenue is likely going to be able to get a slightly larger multiple on that average revenue. So if they're doing 100K a month, they might actually be able to get up to maybe 150. On that facility, their term length will also increase in size as you move to these other runners, probably around that nine to maybe 15 month range now, with the cost of capital likely being closer to that sort of 18 to 20 % of... interest right now. So you remove the upside or the larger cost there and you're likely going to be more confident in that sort of 18 to 20 percent range. Jason Kirby (49:46.209) Now, similar scenario but venture backed with maybe a tier 2, tier 1 VC. How's it change? Kyle (49:53.518) Yeah. So yeah. So at that point, once you have that additional capital from the equity investors and the thought that more capital might be available, the average monthly revenue multiple that you could get is likely going to be significantly higher. So a hundred K a month business might be able to get 300 to 500 K in venture debt. And the rates on venture debt are usually in that 13 to 16 % APR range. with terms that might range up to 24 months on end. Jason Kirby (50:26.867) So that's a pretty substantial difference from a company that was bootstrapped in the cost of capital that they get versus someone that's venture backed with a notable venture firm. So maybe that first company got friends and family angels, they're going to be paying 18 to 20%. Whereas a venture backed institutional investors are going to get much cheaper cost of capital. So that's something that I want our audience to really pay attention to in terms of what's available to them. All right, so let's talk about a really good company. that is profitable, growing, but doesn't have any hard assets. So call it a software company. What options are on the table for them? Kyle (51:06.286) Sure, so a company at that sort of range now that is profitable is likely going to be able to get, again, a further multiple on that average monthly revenue if it's subscription. So call it again the three to 500,000 in capital, usually at three to five X their annual recurring revenue. Their rates are also going to be significantly lower. So this is when you might be able to get private credit facilities and that sort of eight to 12 % APR range. with terms extending up to three or four years, maybe even with interest only payment, interest only periods as well. Jason Kirby (51:44.147) Yeah. So that's a massive difference. So it pays to be profitable. Your cost of debt goes down. The risk to the lender goes down substantially and it's, you know, you're rewarded with a much lower interest rate. and so how, like, give me a profile of someone that's going to get that juicy, sweet, and no interest rate from a community bank. Like what, what characteristics would they have to have to have? Cause everyone wants that number, but I want to show what that bar is to get qualified for kind of tier one bank or a community bank for business loan. Kyle (52:20.408) Sure. So I think when it comes to that, it's not as much going to be purely based on the assets as opposed to the business model and the profitability, ideally from inception. I think banks are more interested in funding businesses they're not going to have to worry about, and they're willing to price that accordingly. So the first thing I would say is if your goal is to get to that sort of sweetheart facility as quick as possible, is absolutely focus on profitability. Profitability is going to set you up for that. far more than just growth at all costs. That would be sort of the first side. The second is don't become overly inundated with short-term debt for the point of maybe short-term goals, right? I think just being strategic about the growth that you have and again, planning this over the courses of years to get to your goals rather than just signing to be here in three months where founders typically make poor borrowing decisions. I think that would also be critical. Generally speaking, I'd always recommend that you go in and even have that conversation with your community bank. See where they're at, what they think of your business. Have that conversation with them. They're going to be more than happy to. And then focus on profitability and making sure that your business will be around in five, six, seven years. And the bank won't have to be worried about you not being here in three, four, five months. Jason Kirby (53:44.637) So I'm really glad you touched on something here that I was going to kind of start as we start to wrap up the conversation here. We talk all about numbers, profitability, factors and multiples, but what we don't talk about and what actually ends up getting a deal done is trust. When it comes to not a transactional provider like a Stripe or PayPal or something like that, when you're actually taking money from a person or an institution that is making a human decision. there is a substantial amount of relationship building and trust that goes into getting and receiving a loan with favorable terms. There's plenty of people that do transactional loans out there that have super high interest rates and whatnot, but when it comes to getting a real deal done that is highly favorable, I would say building those relationships as early as you can, similar to what it is with raising equity. Build those relationships early, have those people in your pocket. You know, so that when you actually need the money or want to go through the process, you have those relationships there, which, you know, if you have a local community bank, just go talk to someone, go sit down at the desk and learn what they offer and what they have, or call someone that you know can get you introduced to the right, you know, parties that will put you in the right room with the right types of lenders. Cause yeah, that's something that, you you mentioned about what Boundless does, Kyle, in terms of putting, you know, not chasing the wrong lender. Cause If you're trying to get, if you're an unprofitable startup and you're going to whatever Citibank, you know, where you have your checkings account, you're probably not going to get what you're looking for. there's specialty providers out there that, and lenders that, service these types of companies. And it's a matter of making sure you find the right one. so, you know, quick plug, if you want help from myself or Kyle, just go to debt.thunder.bc. So quick form, you can fill out. and we'll be able to help you get into the right direction of who you should be talking to, as well as potentially helping you package up all the materials, which is something we didn't talk about today. There's not enough time. But you're building up your debt package in your data room to be optimized and ready to quickly get debt from the right people and making sure you're talking to the right partners that can actually fund you. So that all said, Kyle. Jason Kirby (56:07.603) It's been an absolute pleasure having you on the show. What would be the best way for people to learn more about you or Boundless? Kyle (56:14.776) Yeah, for sure. If people are interested in learning a little bit more about what Boundless does, you can visit our website at www.getboundless.ai and fill out a form there or even start your profile, see who you might match to. And we're certainly happy to have conversations with businesses and help educate them on the types of financing that might be best for them. Jason Kirby (56:39.923) Perfect. Kyle, thank you for being on the show. We'll make sure to include all the links down in the notes below. It's been an absolute pleasure. Thanks for joining us today. Kyle (56:49.696) Awesome, thank you for having me, Jason. Appreciate it.