5 Reasons To Use Convertible Debt For Your Business To Grow On
I know that getting money for your business is hard.
One of the most important things you can do is learn about all the different ways to get funding. As an entrepreneur, you should research what growth options are available to you.
A key financing vehicle for growing companies is convertible debt.
What is convertible debt?
Convertible debt is a type of debt that can be converted into equity. It is similar to regular debt in that it requires interest payments to be made, but it also has the possibility of becoming equity if the company’s value increases.
Convertible debt is mostly arranged by the borrower through the issue of a convertible note.
A convertible note is a form of funding that allows you to raise money from investors but does not require you to give up ownership or equity in your company.
Convertible notes are perfect for startups who have already raised some capital but need more funding to get over a major hurdle such as launching a new product or entering the market.
Convertible notes can be structured in many ways, but generally, they allow investors to convert their investment into equity at a later date if your startup’s valuation has increased enough to make it worthwhile for them.
Here are five benefits of raising capital through convertible debt:
Flexible
Convertible debt is flexible. Unlike a loan, you can structure this type of financing in a way that suits your business and its needs.
You can make it more or less flexible by setting the term of the convertible debt.
This helps you to manage cash flow and interest costs because the interest rate increases as time passes without repayment.
If you have good credit and access to capital markets, this flexibility can be advantageous as well as risky — but with careful planning, it’s also an opportunity to attract investment dollars at lower rates than would otherwise be available through traditional bank loans or equity offerings
Quicker than equity
Here are some of the key differences between convertible debt and equity:
- Convertible debt is a loan that can be repaid in full at any time. Equity, on the other hand, is ownership of your company and cannot be repaid without triggering a tax event for you and your investors.
- Convertible debt can be repaid early with no penalty or interest. If an investor wanted to sell their equity shares early (before vesting), they would have to pay an “exercise price” which typically ranges from 20–50% above market price depending on how far out from vesting date it is being sold.
- Equity investments are often made with little or no due diligence process so investors tend to overpay for companies… but with convertible debt there is much more negotiation around valuation up front before any investment takes place!
Less expensive
The final reason to use convertible debt is that it’s less expensive than equity.
This can be a huge savings for your business and helps make your company more attractive to investors.
Convertible debt can also be structured to require the investor to pay more than the conversion price.
The idea behind this is that you will get a higher valuation for your company by having a lower conversion price on convertible debt that converts into preferred stock at $1 per share, compared to venture capital funding that doesn’t require any discount on the conversion price of preferred stock when converted into common stock at $1 per share.
Leaves more room for common stock
One of the best things about convertible debt is that it leaves room for common stock.
In other words, you can raise capital in two separate rounds with one lender: a loan and an equity round (or multiple rounds, if necessary).
Convertible debt is a loan that can be converted into equity at any time during its term.
Investors get the benefit of interest payments on their investment while having the option to convert their investment into common stock when they feel comfortable doing so.
This unique structure allows entrepreneurs to raise capital without diluting themselves by preventing them from giving away too much equity in their business.
Convertible debt can be a great way to raise money for your business.
Convertible debt can be a great way to raise money for your business.
It’s easier, quicker and cheaper than equity, leaving more room for common stock. It’s flexible and can be converted into equity at a later date.
You should consider converting some or all of the convertible debt into common stock if the company performs well over time or if there is an acquisition opportunity in the future.
We hope you’re convinced that convertible debt is a good option for raising money.
Now, what are you waiting for? Financely Group offers a full scope service, we help clients structure convertible debt transactions and raise capital.
We assist clients on the structuring, execution and distribution of highly customized capital-raising programs across a variety of private company structures and use cases.
Financely Group can be your trusted advisor to help you raise capital at any stage of your business lifecycle, from ideation through maturity.
Click here to start your client journey with us.
