What is Debt Funding?

by | Sep 7, 2023 | Analysis, Fintech

REASONS A FINTECH WOULD CONSIDER IT AS A CAPITAL OPTION

Fintechs have different ways of raising capital to explore business opportunities.

These are some of the reasons Fintechs raise money:

– To explore the initial idea which might require a lot of R&D

– To launch the MVP Product and get to product-market-fit

– For expansion and to afford unique talent.

– To procure Fintech licenses, buildings, or tech infrastructure.

– To access exceptional advisory and board leadership.

– For aggressive marketing.

There are different ways of getting funding for a business. Some of the most popular include Bootstrapping, Angel investing, Crowdfunding, Venture capital, and of course loans. We have various subcategories under loans like Credit facility and Debt Funding. In this article, we are reviewing debt funding as a growing alternative to raise money for Fintechs.

                                                                                         

WHAT IS DEBT FUNDING?

Debt Funding which can also be referred to as debt financing or debt lending is a way to raise money by borrowing from a lender. As with normal loans, repayments will be restructured with interest.

In Q2 2023, these African Fintechs have raised funds through Debt Funding.

🎯 Feb, Egypt-based HollyDesk raised $1 million in venture debt financing to help more small and medium-sized businesses (SMBs) in the country manage and track their daily expenses.

🎯April, Nigeria-based OnePipe raised a $4.8 million debt financing from TLG Capital.

🎯Also last Dec, Future Africa announced a partnership with TLG Capital to set up a $25M venture debt fund for portfolio companies.

DEBT FUNDING VS EQUITY FUNDING

There is a difference between Debt funding and Equity funding. As discussed earlier, Debt funding is getting a loan for a specific purpose from a lender. The lender doesn’t have shares in your company and the loan needs to be repaid. Equity financing on the other hand is selling a part of your business to an investor in exchange for capital injection.

Lets explore the pros and cons starting with Equity funding is in this infographic by Universal CPA review.

http://www.universalcpareview.com/

What does this mean?

It means HollyDesk or OnePipe didn’t have to give away more shares at their last raise. It also means that their cash flow will have higher factoring in the repayments plus interest. It now makes sense why some Fintechs will have to reduce their workforce when they raise debt funding. Makes sense now, right?

REASONS A FINTECH MIGHT WANT TO CONSIDER DEBT FUNDING

Now we explore 4 scenarios that will be best for a Fintech to explore Debt Funding as a capital raise option.

– Is your business generating income or is it trying to find a consistent stream of paying customers? If it is the former, then Debt Funding works.

– Would your business benefit from additional input for decision-making, or will it slow you down? If additional input is needed, then you might not want Debt funding.

– What amount of money do you need for your next business milestone? If it is not huge, go for Debt financing.

-What is the risk profile of your next milestone? Not so risky? go for Debt Financing.

Before we close this piece, let us look at some stats about Debt funding across the continent.

-Debt funding is rising in Africa with 2022 having an almost 50% increase YoY

http://www.semafor.com/

We hope this has given you a lot of insight into debt funding. What was your biggest takeaway?

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