What kinds of startups can use asset-backed debt?
In the article Startup = Growth, Paul Graham describes startups simply as "companies designed to grow fast." Everything that is commonly associated with startups, he writes, is a function of growth and selling into a big market.
Venture funding is a function of growth. And developing technology, or new ways of doing things, is often (but not always) necessary for creating growth. This emphasis on growth has a clarifying effect, writes Graham. In the early, uncertain days of a startup, anything that contributes to growth is good, while anything that takes away from growth is bad.
So while we often write about the how of raising debt, and different sources or checklists for managing your debt capital raise, the why is just as important: to accelerate the pace of operations and, for many of our customers, originations.
In the world of physical goods, physical inventory is the rate-limiting factor for sales. But in the world of financial services, financial inventory establishes a company's ceiling on growth (if you run a lending business, you can't lend out money you don't have).
So how can asset-backed debt actually help fintech and other companies grow faster, and what companies should consider it?
In the a16z article 16 Things to Know About Raising Debt for Startups, Nathan Yoon and Melissa Wasser write that while corporate debt (also known as venture debt) is what most people think of when startup debt is mentioned, it's actually asset-backed debt that most fintech or fintech-adjacent platforms should look to leverage.
According to Yoon and Wasser, the types of startups that can use asset-backed debt are startups that "finance existing assets or assets they will generate, such as embedded financial products and embedded financial services."
Let's unpack that. Once you begin digging in, you realize that many seemingly unrelated startups actually fit this description. A few examples of these types of companies include:
🏠 Startups that customers put all-cash offers on houses, or that buy houses in order to rent them out. In this case, the asset-backed debt would go toward the finance of home purchases.
🚀 Non-dilutive funding startups like Arc. These companies help startups grow by helping them get funding quickly and flexibly backed by their ARR. In this case, the credit facility would be backed by the ARR receivables of the funding startup's customers.
💼 Lenders that help small-business startups stabilize cash flow, consolidate debt, and build up emergency funds in as little as 24 hours.
🎤 Creator economy startups that help artists get cash to fuel their next project without giving ownership.
📚 Income share agreements companies that help students finance education by pledging future income (this would end up being the receivable in the asset-backed credit facility).
🚗 Car leasing or rental startups that need to finance a fleet of vehicles. The assets backing the credit facility would be the cars, and the value of the collateral would change over time as the cars depreciate.
So what kinds of startups can use asset-backed debt? A wide variety of startups with financing components, startups that could eventually become neobanks, and any other startups where some sort of credit is being extended to the end-user. The reason is that the asset-backed credit line is essentially inventory for the startup. The more inventory a startup has, the higher the growth goals it can aim for. You can't sell and deliver products that you don't have in stock!
In all cases, while the startup's "front-end" may be different, the financing "back-end" would actually be a similar type of asset-backed credit facility extended by a private credit lender!
Want to learn more?
Finley is debt capital management software that helps high-growth startups save time and money by automating routine credit facility management tasks. Today, Finley manages over $2 billion in debt capital for high-growth fintechs like Ramp, Parafin, and Arc. If you're interested in learning more about software that can help you streamline your debt capital raise and management, just request a demo of Finley. We'd love to chat!