Debt Financing For Tech Startups; What Does This Mean?

  • Startups need a lot of funding to kick start and remain afloat. There are different pathways to financing your startup business in Nigeria. This could be through equity funding or debt financing.
  • Since the focus of this post is on debt financing, we would be looking at debt financing from a startup focused perspective.
  • What is Debt Financing?
  • Debt financing is funding provided to a startup by an investor, or a lender in this context for a specified period of time. This could be equated to the traditional loan options availed by banks to her customers.
  • With respect to debt financing, and unlike equity financing, startups need not offer equity or any form of company stocks in exchange for the debt.
  • In other words, the lender in this instance has no claim to corporate equity but is entitled only to the principal debt sum disbursed alongside any accrued interests as may be agreed in the investor agreement between the startup and the lender.
  • Debt financing has its pros and cons and we would be looking at a few of these in our next post. Additionally, startups seeking funding must strategically position themselves for investment. Investors typically do a lot of due diligence before disbursing funds to emerging startups and so startups must ensure all checks are made before pitching is done.
  • Startups must also carefully weigh the pros and cons of debt financing vis a vis the various funding options available in the financial market.
  • It’s important to also ensure that your debt financing agreements are examined by your attorney before execution. This would ensure key essentials typically included in a debt financing agreement are present.

References

1 Carl Hekkert, “Debt Financing For Startups; When and How To Get it” available at https://www.zeni.ai/blog/debt-financing-for-startups#:~:text=%E2%80%8D-,What%20is%20debt%20financing%20for%20startups%3F,pays%20it%20back%20with%20interest. accessed on May 15 2023

2 Boss Magazine, https://www.google.com/amp/s/thebossmagazine.com/debt-financing-for-startups/amp/ accessed on May 15 2023

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