Many entrepreneurs in the tech space seek Silicon Valley startup financing from venture capitalists or angel investors. While there is nothing wrong with seeking startup financing from venture capitalists and angel investors for your Silicon Valley based business, keep in mind that you will be required to give up a significant amount of equity. For example, according to BJ Lakeland, CEO of Lighter Capital, you may be required to give up 25% to 45% of equity in your company in exchange for $2 million to $5 million in (series A) Silicon Valley startup financing.
This all depends on your company’s valuation. If you’re comfortable with giving up that much equity, I see no problem with going the venture capitalist or angel investor route. Venture capitalist and angel investors also tend to have the resources and connections you’ll need to build and operate a profitable business. If you need additional resources (like human capital), venture capitalist and angel investors may be the best way to go. If not, you do have other options.
Silicon Valley Startup Financing for Entrepreneurs Who Don’t Want to Give Up Equity
What if you don’t want to give up any equity or don’t need an upwards of $2 million to $5 million in Silicon Valley startup financing? Thankfully, you do have another option. That option is an unsecured business line of credit (i.e. debt financing). That’s right, you can qualify for debt financing for your tech startup. Contrary to popular belief, it is possible to get financing from a bank for a startup business. However, you will need to have a good personal credit history to qualify. If you’ve got good personal credit and you’re comfortable with providing the bank with a personal guarantee, an unsecured business line of credit may be right for you.
How to Qualify for an Unsecured Business Line of Credit
An unsecured business line of credit is not difficult to obtain for a startup business. Currently, the key to qualifying for an unsecured business line of credit is an established, well managed credit history. Your credit history needs to be at least four years old. You also need to have at least $5,000 in available credit limits on your personal credit cards. Furthermore, you can’t have any derogatory or delinquent accounts such as multiple unpaid collections and public records or charge offs and bankruptcies. More than four late payments in the last two years are also unacceptable. In a nutshell, you’ll need to have a superb personal credit history to qualify for this type of Silicon Valley startup financing.
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How Much Silicon Valley Startup Financing Can I Get?
If you qualify for an unsecured business line of credit, the total amount you can obtain is largely based on the amount of personal credit cards you currently have. For example, if you have three personal credit cards with credit limits totaling $10,000 each, you may be able to obtain up to $50,000 (or more) in unsecured business lines of credit. If there are multiple partners in your tech company and each person have good personal credit, you may be able to obtain more. For example, if it’s three of you, obtaining up to $150,000 (or more) in unsecured business lines of credit can be a realistic goal. LenCred specializes in helping startups get unsecured business lines of credit so if you’re unsure of what amount you can get, I suggest reaching out to them for a free consultation.
Is An Unsecured Business Line of Credit Right for My Tech Startup?
If your tech startup needs under $1 million in Silicon Valley startup financing, starting with an unsecured business line of credit may not be a bad idea. BJ Lakeland, CEO of Lighter capital, states that if you need under $1 million you likely won’t be able to get that from a venture capitalist. Venture capitalists usually shy away from investing in anything under $2 million. They like to invest the big bucks (i.e. $2 million to $30 million or more). An angel investor may not be able to afford a $1 million investment so you’ll need to come up with some of that on your own. That’s where the unsecured business lines of credit come in.
Another way to know if an unsecured business line of credit is right for your startup is to look at your revenue. If your business is brand new and not generating revenue, an unsecured business line of credit is probably going to be one of your only options anyway. If you have over $15,000 per month in revenue and have been in business for at least one year, Lighter Capital may be an option. They offer revenue based financing for tech startups and you don’t need to provide a personal guarantee to get it.
What If I Don’t Have Good Personal Credit? What Other Options Do I Have?
If you have less than perfect personal credit, there is one other option you have to finance your tech startup. It’s called a microloan. Microloan lenders typically have less stringent criteria for approval than traditional banks. While traditional banks shy away from lending to startup business owners with less than perfect credit, microlenders actually seek these types of borrowers. If you have less than perfect credit, you won’t qualify for an unsecured business line of credit. If you have no revenue you also won’t qualify for revenue based financing. Therefore, a microloan is going to be your best bet.
How to Qualify for a Microloan
Most microloan lenders require that you have at least a 575 personal credit score to qualify. If you have any charge-offs over $500, they will also expect you to pay them off. Bankruptcies are okay if they have been discharged for at least one year. You also can’t have any foreclosures in the last 24 months. Furthermore, as long as you aren’t 60 days late on child support, student loans or IRS debt, you’re good to go. You’ll need to submit a business plan when applying for a microloan, so if you don’t have one, now is the time to start working on it.
How Much Microfinancing Can I Get for My Tech Startup?
Microloans typically go up to $50,000. However, depending on where your tech startup is located, this amount can be higher. For example, in Detroit (where I live), we have microloan lenders that offer microloans up to $250,000 if you open a business here. Some microloan lenders will look at the largest trade line you’ve ever had and approve you for that amount. For example, if your largest loan or line of credit was only $10,000, they’ll approve you for $10,000 regardless of what you ask for. That’s the only downside of microfinancing. You may or may not get a large amount. The best way to find a microloan lender that offers Silicon Valley startup financing is to check the SBA website. They have a list of the microloan lenders in each state. I suggest going through the list to find links to their website and/or their phone number. Contact them directly to find out the amount their microloans go up to.
The Type of Silicon Valley Startup Financing You Get Depends on Your Needs
The bottom line is the type of Silicon Valley startup financing you get depends on your needs (and what you will qualify for). If your tech business is a startup with no revenues you likely won’t be able to get a venture capitalist or angel investor to invest. Venture capitalist and angel investors want to see that you have some skin in the game. You don’t want to approach them prematurely and risk your chances of being able to go to them in the future. You also won’t be able to get revenue based financing (because the business has no revenue). If this is the case, your only options are unsecured business lines of credit or microloans. If you need over $50,000 (but under $1 million), and you (or one of your business partners) have good personal credit, unsecured business lines of credit are a sure bet. That’s where LenCred comes in. Contact the LenCred team today to find out if an unsecured business line of credit is right for you.