Avoid the RBF Trap: Debt Strategy for Founders w/ Kyle Rector

Full Transcript

Jason Kirby: Hey everyone, welcome back to Fundraising Demystified. Today we're taking a little bit of a turn from our usual episodes to focus on debt and working capital for technology companies. We talk about fundraising all the time—usually equity. This time I wanted to talk about the other type of capital: debt, and all the different shapes and forms it can take.

Jason Kirby: To do that, I brought in one of our partners we’ve worked with on multiple debt deals—Kyle Rector, president and co‑founder of Boundless. Welcome to the show.

Kyle Rector: Please surround me, Jason.

Jason Kirby: I'm excited to have you and unpack debt a bit for founders—pros and cons, how to think about it, and the types of instruments and when to use them. To set the stage, can you share your background and a little about Boundless?

Kyle Rector: I've been in debt financing for over 10 years across banks, specialty finance companies, and fintech platforms. Boundless is a capital marketplace that matches businesses to lenders based on risk criteria—revenue quality, gross margin, customer concentration, churn, operating leverage—so borrowers don’t waste time pitching the wrong lenders. We focus on making the capital application and sourcing process efficient so founders can get back to growing.

Boundless has been around two years as a bootstrapped company. In the last year we’ve seen just over a billion dollars in capital requests spanning small‑business term loans up to a few hundred million, across industries and geographies (US, Canada, UK and others). We have a strong view on what it takes to secure funding and how founders should think about debt in the total capital stack.

Jason Kirby: That’s exactly why you’re here—given your depth of experience working on hundreds of deals and billions in requests. Let’s help our audience understand what’s available and what they might qualify for. First, what is debt and how does it compare to raising equity? How should founders think about both?

Kyle Rector: Debt—business or personal—works the same: you take capital from another party with the promise to repay at a defined time. Unlike equity, where investors see returns at a liquidity event, debt has specific maturities, terms, and repayment structures that give lenders confidence they’ll be repaid within a defined period. Equity is for long‑horizon, high‑upside bets; debt should be purpose‑driven and project‑specific with more predictable outcomes.

Jason Kirby: Founders often default to equity—it feels easier because there’s no obligation to pay it back—and complain about dilution. But with debt, obligations are real and can complicate things, which is why most VCs don’t want early companies taking debt. The key is having a specific application and ability to service it. Let’s talk working‑capital vehicles for tech companies: what do you see approved most often?

Kyle Rector: Start by asking: would you lend to your business? Consider speed of funding—different facilities require different diligence. Use of funds matters too. Common facilities: term loans (lump‑sum, fixed term and fees; good for specific use cases like acquisitions or consolidation) and lines of credit (access capital as needed; generally lower financing cost over time versus a term loan since you only draw what you need). Both can be secured or unsecured, which affects advance rates and pricing.

With term loans for SaaS, repayments are fixed and predictable. Lines of credit let you fund 30‑day needs and flex up for high‑performing campaigns without paying interest on undrawn capital. On security: lenders care about recouping capital—collateral helps. In SaaS, asset‑based loans (ABLs) can include IP as collateral to stretch beyond pure cash‑flow limits, but valuation is tricky and discounts are common.

Jason Kirby: On IP: without inventory, how do lenders value software IP for an ABL?

Kyle Rector: It’s challenging. A company may have invested $20M building a platform, but a lender won’t value IP at par because they must be able to sell it on default. They’ll discount—maybe lend half that at best—depending on appraisals, comps, buyer universe, and how concrete prior valuations are. IP‑backed ABLs tend to fit larger Series A–C companies with clearer valuation signals; early‑stage SaaS usually relies on cash‑flow loans unless AR or other collateral is available.

Jason Kirby: Setting expectations matters—tools exist, but they fit certain stages. We’ve covered term loans and lines of credit (secured/unsecured). Let’s hit venture debt—what is it and how does it work?

Kyle Rector: Venture debt is typically tied to an equity raise. Two common scenarios: (1) during/just after raising equity—lenders are aligned with VCs and expect follow‑on support; (2) bridge facilities tied to an anticipated raise to extend runway. The latter is harder and pricier because of added risk. Terms, rates, and covenants are materially better when venture debt is paired with a new equity round and strong investors.

Jason Kirby: Right—and VCs often bring their preferred lenders. Venture debt can extend runway with far less dilution (e.g., $10M equity + $5M debt). Typically three‑year terms with covenants. The quality of your VC matters for access and pricing.

Kyle Rector: Exactly. Tier‑one/tier‑two VC backing expands options and improves terms. Friends‑and‑family–backed companies usually can’t access classic venture debt on favorable terms.

Jason Kirby: Let’s talk revenue‑based financing (RBF). It’s easy to get, but can be a poison pill. What is it and how are founders using it?

Kyle Rector: RBF is effectively a merchant cash advance. You sell rights to future revenue plus a fee. Repayments are a fixed share of revenue (say 10%), so payments flex with performance—lighter in slow weeks, heavier in strong weeks. The danger is stacking—taking multiple RBFs so 20%+ of revenue is diverted to repayments. If margins are 20%, you’ve starved the business. Use RBF only for repeatable paybacks (e.g., proven CAC/LTV loops), not speculative projects.

Jason Kirby: We see founders fall into this trap—especially in e‑commerce—because it’s so accessible (one‑click capital). If you stack and don’t grasp your unit economics, you end up taking debt to pay debt—growth stalls and equity won’t touch it. If you use RBF, model payback carefully and shop the market—there are many lenders with more favorable terms than the default big‑platform offer. And don’t use RBF pre‑PMF.

Kyle Rector: Agree. Spend RBF on proven, repeatable channels—where a dollar reliably returns more dollars. Because payments vary with revenue, planning is harder; predictability matters.

Jason Kirby: Beyond term loans, LOCs, RBF, and venture debt—what other vehicles appear for tech founders?

Kyle Rector: AR‑backed lines are increasingly common. If you have strong counterparties under contract and healthy AR aging, lenders will advance against eligible AR (often up to ~80–85%). This suits businesses with annual billing, longer payment terms, or hardware+software blends. Lenders underwrite your AR quality, concentration, and collections capability.

Jason Kirby: How should a founder prepare to secure debt—what boxes should be checked?

Kyle Rector: Start with the lender’s lens: would you lend to you? Clarify use of funds and whether you’ve executed similar spend before. Understand your current debt stack and repayment schedule. Model the impact of new debt on cash. Lenders focus on historicals and downside—unlike equity, which is upside‑driven. Track DSCR (net operating income / total debt service); over 1.0x, ideally 1.2x+, is favorable.

Jason Kirby: How do founders practically compute DSCR—EBITDA or cash?

Kyle Rector: Tie it to the facility’s term. For a 3–9 month MCA, look at the last 3–9 months of cash in vs. projected repayments. Larger structured facilities will consider profitability metrics (EBITDA/net income). As a rough rule: under ~$300k MRR, you’re likely in cash‑flow loans; above that, with assets and predictability, you open up better, longer‑term bank/senior facilities.

Jason Kirby: Benchmarks? What separates options for “not so good,” “decent,” “venture‑backed,” and “great” companies?

Kyle Rector: Not so good (sub‑$1M revenue, choppy, not profitable): expect ~0.85–1.0× monthly average revenue in a term facility (e.g., $80–85k) or ~$60k LOC; ~6–9 month terms; ~15–25% APR; daily/weekly payments.

Decent (growing, $1–5M revenue, not yet profitable): higher multiple on monthly average (e.g., 1.5×); ~9–15 month terms; ~18–20% APR.

Venture‑backed (tier‑1/2 VC): access to venture debt at ~13–16% APR, 24‑month terms; amounts ~3–5× monthly revenue (e.g., $300–500k on $100k MRR).

Great (profitable, growing SaaS): private credit in ~8–12% APR, terms up to 3–4 years, sometimes interest‑only periods; amounts at 3–5× ARR depending on metrics and covenants.

Jason Kirby: What earns those “sweetheart” community‑bank rates?

Kyle Rector: Profitability and predictability. Banks price low risk; they want to fund businesses they won’t worry about. Focus on sustained profit (not just a month or two), keep short‑term debt manageable, and build relationships early with community banks. When your lending base (AR ~85%, inventory ~50–60% of cost) reaches ~$1M, the product set, pricing, and covenants improve dramatically.

Jason Kirby: As we wrap: trust and relationships close the best deals. Start early—meet lenders, learn their products, and get intros to the right specialty providers. Quick plug: if you want help from me or Kyle, go to debt.thunder.vc to get pointed to the right lenders and package your materials.

Jason Kirby: Kyle, what’s the best way for people to learn more about you or Boundless?

Kyle Rector: Visit www.getboundless.ai to learn more, fill out a form, or start a profile to see lender matches. We’re happy to help founders understand which financing types fit their situation.

Jason Kirby: Perfect—thanks for joining us.

Kyle Rector: Thanks for having me.

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