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Courier Workshop episode 1: Debt financing

Courier Workshop episode 1: Debt financing

Don't forget these tips, too.

The headlines might be dominated by startups raising big rounds from venture capitalists, but traditionally businesses were – and in many cases continue to be – built using debt. We share the experiences of small business owners who have used debt financing, alongside practical tips from the experts.

AMIRAH: From Courier, I'm Amira Jiwa.

DUNCAN GRIFFITHS NAKANISHI: And I'm Duncan Griffiths Nakanishi:.

AMIRAH: And welcome to Courier's Workshop podcast. This bi-weekly show, running in sync with our Workshop newsletter, focuses on one aspect of running a business that you may or may not know much about – and explains how it could be useful for you. Over the course of the show we'll delve deep into a frankly dizzying range of topics. But always with the aim of getting you just the right amount of info that you need to help apply what we're talking about to what you're working on. I'll be speaking to the experts with practical tips and the founders with relevant experience.

DUNCAN: And I'll be explaining essential terms and summarising the key takeaways at the end of the show. So don't even think about leaving until the episode’s over.

AMIRAH: For this week's show, to kick things off in an appropriately wild style, we're looking at a key way to raise capital. No, we're not talking about raising big rounds from headline-grabbing VCs, but something that the vast majority of businesses use to get started and grow. That's debt. 

While equity financing involves selling shares in a company to investors, debt financing raises money through borrowing – be that short term, like a loan or business line of credit, or long term, like leasing equipment or buildings. Naturally, that debt has to be paid back with interest at some point in the future. 

I caught up with two founders on two different continents in two different industries who have both relied on debt financing to grow their businesses. Though the use cases were different, the primary reason for choosing debt over equity was exactly the same in both cases – keeping control.

RAFAEL ROZENSON: One of the really important things for me with this business is I've worked for a lot of really big companies, where I felt I wasn't really in control, I felt really frustrated and not really happy. And part of the reason I started my own business is wanting to be in control. So the whole idea of having another shareholder where I had to give up a lot of big stake in the business and lose control is really concerning.

NICK PANDOLFI: For my brother and I, what was important was controlling the growth of the business and doing it at a pace that we were comfortable with. So for us, control was the number one factor when it came to deciding between debt and equity.

AMIRAH: That was Rafael Rozenson and Nick Pandolfi you just heard. We sat down with the two business owners to discuss the ins and outs of the debt financing process. 

First up, here's Rafael who founded Vieve drinks in 2017. Vieve is a range of water-based protein drinks that are available to buy online and in gyms in the UK. They're also exported to 16 different markets across Europe, Asia and the Middle East.

RAFAEL ROZENSON: In the two and a half years that we've been operating, most of our funding has come through debt financing. We did do a fundraising round where we did raise money, but primarily most of it has come through debt. So that's been a combination of a Virgin startup loan when we started, which is really great. I always recommend it to anybody who's starting a business, it's like 25,000 that you can get that's repayable over five years. So we did that. And then we got subsequent loans from the bank, we also recently approved for a bounce back loan from the government loans programme, which is really great.

AMIRAH: I know you've had a long history within fast-moving consumer goods, and you're starting a business that you are an expert on. So you clearly had equity financing as an option. Did you have offers for equity financing that you chose not to take? Or was it always going to be debt?

RAFAEL: You know, in the beginning, I think I didn't even try. We had some initial discussions, and we just realised it would be so challenging, I would have to give up so much of the company and the valuations that a lot of investors were looking at – which is fair enough, they were looking at it from more of a practical kind of lens – I just didn't feel it was on par with the expectations I had of the business. The other reason in terms of why going for that personal equity is that fundraising and investing takes a long time. So, it takes up a lot of energy in terms of the focus. And for me, I'm a sole entrepreneur, so I don't have any employees, I don't have other people in the business. So, the time I spent raising money is time away from driving sales and focusing on marketing the business – things I should really be doing.

AMIRAH: Actually, in terms of accessing that debt financing, you mentioned a Virgin startup loan, and then alternative debt financing that you've taken on since then – what did you need to get that first loan? Were they basing it on projected cash flow? Were they basing it on assets that you had? Were they basing it just on a business plan?

RAFAEL: In the beginning with the Virgin startup loans, it's actually quite a good process because they make you do a lot of financial forecasting, put together a business plan, and then you have to put it to a committee. So there’s different companies that manage the startup loans programme, but it's generally a process where there's enough due diligence that they want to see that you have a plan, you have an idea, you have some financial forecasts, you've got a product or service that you've actually thought about how you're going to take it to market.

AMIRAH: But you don't necessarily need revenue at that point. 


AMIRAH: You need a plan for revenue.

RAFAEL: Yeah. So that's why I always say to any entrepreneur: the startup programme is a government-backed programme, it's really great. And it's really ideal if you're starting a business because if you were to go to a bank at the beginning, I think these days especially it's very, very, very tricky. I don't think you can go to a bank just saying you have a business idea from scratch. 

In terms of a long-term strategy, I think it just makes sense for us, because eventually, I do want to sell on the company in four to five years. So in terms of the equity stake that I still have in the business is quite high. As those initial investors came in the beginning, they still own a decent chunk of the company that will be quite valuable in a few years. And I think it makes the discussions that we have with investors, whether it be venture capital firms or angel investors or what have you, it's just much easier when you have less people that you have to deal with on your cap table.

DUNCAN: Duncan here – we'll be taking a few timeouts every now and again, to break down and explain a few key terms. So, what's a cap table? Well, basically, it's a spreadsheet or a table that shows which shareholders own what stakes in the company.

AMIRAH: You don't have to go around chasing a tonne of people to make any decisions!

RAFAEL: I mean, especially if some of them control a decent enough share in the company where they can effectively block deals in the future. You know, I think the threshold is 20%. So that makes things really, really difficult. 

Yeah, it's funny when we talk to investors now and we say, ‘Oh, we've only got three other investors.’ They're like, wow, they're like shocked. It does become a good selling point later on in the long term. 

We have had historically low interest rates in this country for about the past decade or so. And we will continue to have low interest rates, given the current situation, probably for the next, who knows, probably four to five years, I would estimate. So that just means your cost of borrowing money is very, very low. So, for example, the bounce back loan, I think the interest rate is 2% maybe? 

So, essentially, you're almost getting free money, right? The whole idea behind investment or debt financing is you take £10,000 from the bank or from an investor and you can turn that into more. So you can invest in marketing and people and generate a return. In effect, if somebody's giving you that money at an incredibly low interest rate, and you don't have to give up a big chunk of your company, it just makes a bit more sense, I think – because the value of the amount that you're giving up in the future can be so high.

AMIRAH: And now, here's Nick, general manager of Jono Pandolfi Designs, a handmade ceramics company based in New Jersey. They primarily sell ceramic dinnerware to restaurants, although they're currently moving to more of a direct-to-consumer model.

NICK PANDOLFI: So after the company had been around for over 10 years, we had reached an inflection point where we felt really confident that there was strong demand, but we needed some additional equipment to keep growing the business. Specifically, we needed to buy a big commercial kiln. And that was going to triple our production capacity. 

We had to make a decision as to how we wanted to finance this kiln. We had spoken to some investors that were going to take an equity stake in the company, and we also spoke to a bank that was going to give us a loan and we ultimately decided to go with the bank and take on the loan and finance this kiln through debt.

AMIRAH: Great. So let's talk a little bit more about that first bank loan. What kind of loan did you get and what were the terms for repayment?

NICK: So we took out a collateralised loan...

DUNCAN: Me again – a collateralised loan is when a business secures a loan by putting up an asset, like a building, or equipment, as security.

NICK: I think it was for $100,000 because it included some extra money to manage the shipping of the kiln and the installation of the kiln. It was a five-year term. So we would pay a fixed amount each month. And I think the interest rate when we took out the loan was about 6% or 7%. But it's gone down since then, because it's a variable rate and interest rates have gone down since we took out the loan. We would pay around $2,000 a month. And then we actually paid back the loan early. So we paid back the loan after three years, just because our growth kind of exceeded what we thought it would. And since then we've taken out a second loan, very similar terms, for a second large kiln. We got the loan last year, put in the order with the kiln manufacturer, the kiln was just shipped to us.

AMIRAH: And how is dealing with the bank and going through the whole process of getting the loan in the first place?

NICK: So it wasn't too complicated to get the loan. I think the bank that we worked with is more used to business models that are a lot more cut and dry. So our banker spends a lot of time giving loans to doctors’ offices or orthodontist offices and so he knows what the financial model for a new orthodontist chair is. And it's pretty easy for them to underwrite those loans. But for us, we really had to educate them on what our business is. They came to the studio, we gave them a tour, we showed them the products that we made. We showed them our client list, which is a big asset to our company. We sell to hotel chains like the Four Seasons, Waldorf Astoria, the Rosewood... So I think that gave us a lot of legitimacy. 

But the most important thing we showed them was our history of growth. We had always run the company in a very financially conservative way. So we never took on too much debt, we always paid it back, we were profitable most years in the history of the company. There was a very strong growth trend there. It didn't take a lot of convincing, we just had to educate them on what our business was and show them that we would be able to pay back the loan.

AMIRAH: Finally, what do you see as the key benefits of debt financing over equity?

NICK: I think all we hear about on the news are these startups that have insane valuations, and 10 x their revenue every year. And I think it's important to realise that the majority of businesses out there are not doing that – they're growing slow and steady, they have really solid financials. And a lot of times the goal is just to run a really strong business without having to achieve insane growth. And I think equity financing puts so much pressure on businesses to grow so quickly. And that's really the only story that we hear in the news. And I think it's important to know that there are a lot of businesses out there that are just growing at 20%, or 50%. And just providing a really good product, providing a really good environment for their employees. In a lot of cases, debt financing is the better tool for those kinds of businesses. And I just think those sorts of stories aren't really told enough. And I'm happy that you guys are shedding light on that.

AMIRAH: OK, so after hearing from Rafael and Nick, maybe you're sold on debt financing. The next question is, how do you go about actually getting that loan? 

We spoke to Jason Garcia from INTRO – a new platform connecting founders with innovative financing alternatives that sit somewhere between traditional bank debt and selling equity. Jason gave us some practical tips about finding the right lender, and some unusual ideas for what you might borrow against.

JASON GARCIA: Entrepreneurs, typically, when they think about funding their business, they think about either bank debt – which is super restrictive, and not very available for early stage companies, or even some mid stage companies. If they think of that as debt, then the only alternative that they think of is VC, even though there's actually a continuum of products that sit between bank and VC, there's not a lot of understanding of what's out there. And then also, these firms and these new types of financial products are not super readily available, either.

AMIRAH: So, what are some of these more unusual financing options?

JASON: It depends on the company that you are – if you're an asset company, and you've got a lot of assets flowing through your business, like inventory, or even customer invoices like AR. 

DUNCAN: In this instance, AR doesn't mean ‘augmented reality’. It means accounts receivable or money that's owed to a business by a customer who's purchased something on credit.

JASON: You're able to kind of leverage those for lines of credit and things like that. Banks do some of that, but typically, it's a lot more restrictive. So the way that business models have evolved over time, they might not have inventory. There might be a software business which is a large and growing base of kind of entrepreneurship. So they might have a software business, they might not have AR, but they have recurring revenue, they have contracts that allow them to get an annuity stream from their customers. And a lot of people have built different types of financial products around it. So one example would be revenue-based financing, there's some larger firms, like Lighter Capital, and some of those folks have you pay back that loan by committing a certain percentage of your revenue. 

But then there's other innovations on that, too. There are people that are building lines of credit, they'll give you actually a multiple of your actual monthly recurring revenue. There's also others – kind of a new entrant in the space is a company called Pipe that actually builds or allows you to actually pull your contracts forward. So if a customer is going to pay you $100,000 a year, or $120,000 a year and they're paying $10,000 a month, then you're actually able to go to Pipe and be able to say I want to actually have $100,000 up front. And then as the $120,000 comes through, then I'll pay a small fee to Pipe to finance that. So it allows you to kind of pull your customer payments forward. So yeah, there's a wide range of innovative modern financial products that are developing.

AMIRAH: You know, one of the issues with more traditional bank loans is that they're sometimes not as accessible to founders and business owners from more marginalised backgrounds because of systemic biases within the financial system. 

Are these newer debt financing options that you've been telling us about more inclusive, do they focus more on the business that you're running and less on the person that you are?

JASON: Yeah, that's what is the most exciting about it. So when you think about debt financing, and you also think about VC, it has the same common problem, which is it relies so heavily on the person that's behind the business. VC, obviously pattern matching and looking for that – where did you go to school, where did you grow up, who's your network, those types of things. And then bank debt using credit checks and those types of things, there's kind of systemic issues there that over index on the individual. 

The great thing is these modern financial products are almost entirely focused on the numbers. So the business is able to speak for itself, rather than having to attach a face to it, that can cause some of these problems that are maybe intentional and maybe unintentional. 

Going back to the e-commerce or sales efficiency financing, what they're doing is they're ingesting your company's performance, and then they're giving and offering financing to you based off of that performance. It's pretty mathematical. And so it's numbers over narrative, which I think is a better approach that helps give more access to founders and companies of all sizes, and of all different demographics and representation.

AMIRAH: And where can founders find these more innovative debt financing options, can they just ask their bank about them?

JASON: It depends on the bank that you're talking to, and the financial institution that you're talking to. It depends on where you're at in your life cycle – if you're not able to access debt financing because you're too early or you don't quite have the scale there, there's a little bit of smoke in your business, but there's not a whole lot of indication yet of where it's at. That's a difficult situation, I think, for any kind of debt capital. The one need that debt cannot fill is funding a business that doesn't have revenue yet, right? That's not really something that debt can solve. If your company has some revenue, then they can lend to the business.

AMIRAH: Great. What's the future of debt financing, in your opinion? Will these kinds of alternatives just become even more readily available?

JASON: I think it's important to note that the innovation and the new types of financial products that are popping up, it's not going to stop, but it's only going to continue to accelerate. And I think we're going to see even more innovation that's happening over the next couple of years. I think the VC model, we've found out that it only fits for very few companies. And when it works, it really works. That financial product is purposefully built to create a certain type of outcome. It's fantastic when it works. When it doesn't work, it can ruin companies and kind of put them on an unsustainable path. So I think the demand from founders for something new is going to continue to create new options in the market. 

AMIRAH: Thanks to our guests, Rafael, Nick and Jason, for joining us on today's show. Here's Duncan to wrap up what we've learnt.

DUNCAN: Number one – whether you go for debt or equity can often depend on long-term strategy. If considering a sale at some point down the line, equity financing will reduce the money you'll make – as early investors are likely to want significant percentage of the business. If planning to keep hold of your company, debt will help you keep control and grow at your own pace, although it obviously comes without the advice and support that many investors provide. 

Number two – getting hold of any kind of debt financing without some form of recurring revenue is extremely difficult. Options do exist, one being the Virgin startup loan that Rafael mentioned. That process involved putting together a really strong business plan with financial forecasting and a plan for taking it to market – and obtaining capital based on that. 

Number three – there are a range of newer debt products that sit between VCs and the bank, whether they're suitable for your business depends on where you are in your trajectory. And what you've got as leverage. That leverage could be assets like inventory, real estate, customer invoice or recurring revenue. 

So, if you're interested in learning more about debt financing, or just want to review some of the key things we covered here today, sign up for our Workshop email newsletter, which runs in sync with this podcast. It takes a look at key concepts, tools to use and points you in the direction of some excellent resources to check out. That's available at

AMIRAH: If you have any questions about this podcast or any ideas for topics we should explore on it and in the newsletter, you can drop us an email [email protected]. Workshop's back in two weeks.