Early-stage, pre-revenue, or early revenue companies frequently have the same dilemma. It’s a “going enterprise” but has not yet hit escape velocity and become self-sustaining. What is the source of the essential, nurturing Working Capital to indeed become self-sufficient? Or, to grow exponentially, as its product is “discovered” and cash is required to deliver product and book revenues? What’s the best (only) source?

Generally, early-stage companies have been funded by venture capital (VC) of one sort or another. This could be an established VC fund, a founder with deep pockets, “friends and family,” or some other amalgam. Just because they are “early stage” does not mean seedlings, but simply still youthful compared to where they are going. Today, it is easy to look back at Google, Apple, and the like — and the legendary early hit-or-miss existential trials they all went through. Today, AI leads the gold rush, and future giants are similarly going through early-stage jungle-survival adventures.

In so many of these cases, the founders/CEOs are, or have been, convinced of the merits of their budding enterprises. They think they have “the prettiest baby at the party,” and so it’s only investors’ lack of vision that keeps bags of money from appearing at their doorsteps. Ah, if only reality weren’t so harsh!

Competition: The Debt vs Equity Solution:

Thus, the debt vs equity equation comes into play. Presumably, equity of whatever nature has gotten things to where this competition becomes a factor. Adding equity on top of the original birthing level risks diluting the shares of existing investors, or their future returns — the reward for having assumed that early risk. Repeat equity raises at successively higher early-stage valuations are part of the evolution. It’s great if indeed succeeding equity tranches are at higher valuations, but so often this is not possible as the inevitable delays of whatever nature have prolonged the expenses and timetable of reaching “independence” in self-sufficiency. Thus, not going back to (the same?) equity investors, hat-in-hand, possibly with dilution, is desirable. Alternatively, when things are humming, a simple back-envelope calculation may show, if all continues well, rapid double/triple equity value growth, and funding additional Working Capital with debt, however expensive, is still a favorable path for the equity owners of the business. (See “Hurdle Rate” discussion in our prior Working Capital Solutions column.)

So, for a going, revenue-producing business, when should you take on “positive cash flow” debt?

Case Study: Flying Wallenda

We recently came across a rather interesting situation, given the current air traffic issues here in the US. Recent headlines are all about delays due to air traffic (and support) slowdowns, not equipment shortages. But that risk is also quite graphic to anyone confronting the current mess. The company, Wallenda, some time ago recognized an opportunity to reduce aircraft downtime. That equation is pretty basic: commercial aircraft, average cost (investment) well over $100 million, and every day out of service for maintenance costs airlines hundreds of thousands of dollars in lost revenue per plane, not to ignore that revenue’s contribution to plane mortgages and leases. Add more downtime per airline, and industry losses become significant. Spare parts shortages extend that downtime in an industry where profits have historically been volatile and elusive.

Wallenda management, knowledgeable about air shipping and commercial aircraft hardware, identified a supply line bottleneck for key critical aircraft maintenance parts. It recognized that end-of-life mainstream commercial (i.e., Boeing, Airbus) aircraft have many reclaimable, revivable key parts that, with rejuvenation, would meet and exceed requisite standards. Because they knew the industry, management had a working relationship with established facilities doing such work and the requisite logistics for acquiring and moving the hardware. They were not targeting a lot of different items. Focus is only on a handful of essential parts readily adaptable to this model.

Note: Wallenda was not inventing a “new” product, so did not have risk related to market interest and demand on economic terms for a new product. Rather, they were identifying a way to reduce bottlenecks and the supply timeline of an established, essential, existing product. They also ascertained that, if they captured only 1% of the market, they would be roaringly successful, based on their economics. Every air traveler who has experienced multi-hour delays can appreciate this opportunity.

Because they were active in related businesses, Wallenda was able to raise $10 million in “friends & family” seed equity and launch the company. Quickly acquiring and processing the specific, limited range of hardware, they realized first revenue in 6-7 months.

Great! But, as with all such early-stage ventures, a few issues. First, the hardware involved was $2-4 million per purchase, which could be turned around quickly at twice their purchase cost. Restoration-related activities created expenses. Then sales, even though to recognized airline names — great counter-parties, but not necessarily quick-payers — quickly chewed up available cash. Sales were good but “lumpy.” Two million dollars one month, then nothing for another month or two. “Proof of concept” had been established, but even with $10 million cash to start, things were pretty uneven. Thus, management looked to debt as the best next funding step. Specifically, seeking up to an additional $10 million in Working Capital debt to match the equity and thus double buying power and accelerate the business’s takeoff.

Great business model, solid product, name customers, experienced management, solid $10 million balance sheet, offering to collateralize inventory, $4 million revenue in the first 6 months of sales. CEO: “Lenders should be lining up to match our $10 million 50/50.” Classic! This correspondent has never met an early-stage (or even a later or much-later-stage) CEO who didn’t think they had “The prettiest baby at the party.“ (Every equity investor universally should hope that true anywhere they have placed their money!) But that same enthusiasm tends to color objectivity.

Debt

Wallenda wanted to raise more money to apply to their formula. They sought debt for two reasons:

1. Less dilution. They were convinced they had a winner and were reluctant to have to share the pie.

2. Liquidity: They wanted the money sooner rather than later and generally assessed that debt would be available more quickly.

Finding additional equity investors might take a little time. Their hardware purchases are opportunistic. Having ready cash secures the best offerings. They wanted to have that cash “this week” — or as soon after as possible.

Wallenda appears to have a quite promising business, but one still unseasoned. A few private credit lenders took a look and, though impressed with potential, the nascent revenues, particularly the “lumpy” nature by virtue of the product, kept them from pulling the trigger. They all were interested in re-visiting possibilities after another 6-12 months of revenue history, but the unevenness kept them from committing. While Wallenda readily offered the inventory as two times collateral, lenders were less sanguine about a toolbox of spare parts. As collateral, one lender commented, ”Not exactly like a lot full of brand new Teslas, or even a bunch of old Chevys.”

Puberty

So, Wallenda’s immediate growth was stalled with the company in the abstract evolutionary middle ground before it became firmly established. Puberty! In contrast to so many high-fatality-rate early-stage ventures, Wallenda appears to have quickly created a real and sustainable business — not by creating something new but rather by solving an existing problem on a cost-effective basis. Great! But that gave them the belief that their budding enterprise should be readily able to borrow as much as $10 million, matching equity. Sadly, though, early-stage lenders are a hard lot, descendants of Scrooge himself. They learned long ago about the pitfalls of promising early-stage companies and so maintain their hard and fast, seasoned templates as to what they will and won’t loan against. Proverbially, “It is he who has the gold who makes the rules.” Actual Revenues, not forecasted, are what separates “wannabe” ideas and real businesses. Wallenda appears to be on the real business path, but a further revenue demonstration is the hard evidence needed to access lender cash.

Conclusion: What Was Really Happening.

What Wallenda was missing, in enthusiasm, was that management was (unconsciously) looking to shift equity risk to debt holders, despite how promisingly “no-brainer” that debt seemed to be to the company. Debt holders, though, also consciously or not, within such an equation, did not see that they were being compensated at prospective equity risk levels in their debt structure, so refused to bite. Why is this a case worth looking at, other than the adventure? Simple: the objectivity of early-stage CEOs is too frequently colored by the enthusiasm we require and expect as investors.

The best way to move the objectivity needle? Other than the sobering reality of a rejected loan application, having good counsel — the company’s attorney, accountant, board, and advisors of whatever ilk. Less emotion, more objectivity. Someplace, somewhere, having a good sounding board to bring candid, possibly unpopular contrary opinions, whether regarding capital structure or other key business decisions that pass the reality check.

In the Wallenda case, whatever the Working Capital resolution, it will certainly not be fatal. More likely, just a little slower growth over the next year or two. For other early-stage companies, getting off on the wrong track, whether funding, strategy, or other critical elements, salvation may not be so certain — so a regular and sometimes harsh Reality Check is essential. This may apply well into corporate mid-life and further. Just ask the former provider’s earlier “promising ideas” — like, say, Fax Machines.

About the Author

Robert S Darbee is the CEO of the New York advisory, Omni Capital Corporation. He is former President, The Bank of New York Trust Company, institutional investment arm of the parent.

If you have a question prompted by this commentary, feel free to email Bob at rsd@omni99.com, whether it’s simply a question or an inquiry about possible funding, as described here. Include “TCLM” in the subject line.

A Message from Our Partner

Omni Capital Corporation specializes in Private Credit Solutions for Small and Midcap Revenue-Producing Growth Companies. Omni offers 3 Non-Dilutive Strategies which can generally provide funding within 7 days for companies, public or private, with qualifying profiles. Sector-agnostic funding, “it’s all in the numbers.”

• Revenue-Based Financing (RBF): Minimum 12 months revenue history, $100K/month. US-based companies. Ideal as Working/Growth/Bridge Capital to execute, and get to the next level. $100K-$15 million. Sector-agnostic. No collateral, no PGs, not MCA.

• Invoice Financing: Turn current Accounts Receivable into immediate cash. US and Canadian companies. $250K-$100 million. Ideal for cash to execute, get to the next level, and take on new opportunities utilizing an existing resource.

• Purchase Order (PO) Financing: Coupled with Invoice Financing. Do you have a business opportunity with a creditworthy customer, an established product channel, or a need for capital to produce? Requires established products and reliable counterparties, but a great way to grow your business without selling equity or an asset. Terms based on particulars. $250K and up, no limit.

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The revised policies were implemented amidst broader national debates regarding immigration enforcement and the desire to prevent "ineligible persons," such as foreign nationals, DACA recipients (Deferred Action for Childhood Arrivals), or those on student/work visas, from accessing government-backed capital. In early 2026, the SBA revised its definition of an "Ineligible Person" to specifically include individuals who are citizens of or have a Principal Residence in China or Hong Kong.

The New Requirements: Effective March 1, 2026

As of March 1, the SBA now requires that 100% of all direct and indirect owners of a small business applicant be U.S. Citizens or U.S. Nationals. Furthermore, these individuals must maintain their Principal Residence within the United States, its territories, or possessions.

In a departure from historical norms, Legal Permanent Residents (LPRs), commonly known as “Green Card” holders, are now barred from owning any direct or indirect interest in an applicant business. This policy also rescinds a brief exception that previously allowed up to 5% ownership by foreign nationals or non-resident citizens. Lenders must now trace ownership interests entirely to individuals and verify the citizenship status of every owner.

The Evolution of Ownership Requirements

The eligibility landscape for SBA financing has shifted from a philosophy of inclusion to one of strict mandates over the last two decades:

• The Long-Standing 51% Rule: For nearly half a century, SBA policy allowed businesses to be eligible if they were at least 51% owned and controlled by U.S. citizens, U.S. nationals, or LPRs. Under this framework, LPRs were historically eligible to receive SBA financing as they are authorized to live and work in the U.S. permanently.

• The June 2025 Tightening: On June 1, 2025, the SBA implemented a new Standard Operating Procedure (SOP 50 10 8) that increased the requirement to 100% ownership by citizens, nationals, or LPRs. This change also introduced a six-month lookback period, ensuring no “ineligible person,” such as a foreign national or DACA recipient (Deferred Action for Childhood Arrivals), held an ownership or key employee role within six months of the application.

• The Short-Lived 5% Exception: For a brief window (January–February 2026), SBA Procedural Notice 5000-872050 allowed a narrow exception where up to 5% of a business could be owned by foreign nationals, conditional LPRs, or citizens residing abroad.

• The March 2026 Mandate: The current policy completely removed the 5% exception and fully excluded LPRs from ownership eligibility.

Impact of Previous Policy Shifts

The move toward 100% citizenship requirements has already had a measurable effect on the lending market. Following the initial tightening in June 2025, small business lending saw a drastic 46% reduction between June and August 2025. Many businesses that had previously used SBA loans to create jobs lost their eligibility for new loans solely due to minority foreign stakeholders or owners who were not citizens.

Expected Impacts of the March 2026 Change

The total exclusion of LPRs is expected to have a substantial impact on the U.S. economy, given that there are approximately 14 million Lawful Permanent Residents in the country.

Key expected impacts include:

• Increased Administrative Burdens for SBA Lenders: Lenders must now adopt much more stringent verification procedures, likely leading to delayed processing times and higher administrative costs for all small business owners. Lenders are currently advised to carefully review “PLP” (Preferred Lender Program) approval dates to ensure compliance with the specific set of rules, out of three possible sets, that apply based on when the loan was approved. These burdens may make private lenders less willing to work with businesses that have complex or international ownership structures, as lenders must now trace 100% of all direct and indirect ownership to individuals.

• Reduction in Startup Capital Pathways: Small businesses now lose eligibility for SBA-backed private credit if they accept even small amounts of startup funding from non-citizen friends or family members. This restricts a common method immigrant entrepreneurs use to gather the initial capital necessary to eventually qualify for larger private credit facilities.

• Stalled Business Growth and Closures: Non-citizen entrepreneurs are twice as likely as native-born citizens to start businesses, and they own nearly 20% of all small businesses in the U.S. Restricting their capital access has already contributed to decreased revenue and staff reductions. Some immigrant-owned businesses have already fully or partially closed due to the uncertainty and fear surrounding these policies.

• Economic Stability Concerns: Because LPRs contribute significantly to sectors like food services and retail, losing access to SBA capital could deplete a vital source of local revenue and job creation. Long-term, the restriction of credit to a large segment of the entrepreneurial population may result in higher prices for goods and services as small business competition decreases.

The Bottom Line

The March 2026 revisions to the SBA’s citizenship and residency requirements represent a decisive effort to align small business lending with broader national security priorities. By mandating full U.S. citizenship and domestic residence among all business owners, the SBA aims to reduce potential exposure to foreign influence within federally backed lending programs. However, these same measures also introduce challenges to local economic dynamics, especially for communities that have historically benefited from immigrant entrepreneurship and investment.

As both lenders and policymakers adjust to the new framework, the central policy question will be how to maintain integrity in the lending process while preserving fair access to capital for legitimate domestic enterprises. The ultimate test of these changes will lie in whether they can safeguard economic security without constraining the innovation and growth that small businesses bring to the U.S. economy.

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The Lesson for the Day

Case 1: Texas Whiz

We recently came across a familiar situation. After years of planning, research, and development, a southwest US company finally had a product and modest early revenue “sprouts.” This company sought funding to produce inventory, expand staff, increase production, and finance accounts receivable. In a word, growth! The company actually had a product versus so many kindred money-hungry ventures that are still in the development stage. The balance sheet and nascent revenue, however, were insufficient to support any kind of debt funding.

The company had a product, embryonic revenue, and was 90% of the way to self-sufficient “escape velocity.” It appeared that the requisite capital still needed was venture equity. While the company had product and first revenue, the risk was still an equity one, not one that would be embraced by a prospective lender, conventional or otherwise. Likely, funding that company will be welcomed by a lender not too far into the future, when product and revenue are beyond the sample stage and are clearly established, but not yet. This is still a venture capital proposition.

Case 2: Bottled Energy

By contrast, we also recently encountered a somewhat similar case, but where debt, even expensive debt, made a compelling case. A management team had an energy drink well-launched with established revenues and was offering $2 million equity on a $16 million valuation. The funding would be Working Capital for product inventory and distribution. Once again, growth!

The same team had a prior success, almost mirroring, having taken a kindred product from scratch to a $200 million exit in 5 years. This observer questioned why, in this case (an established track record and solid early revenue), dilutive early-stage equity was offered? If the prior success could be matched even partially (savvy and proven team, access to distribution, known pitfalls to avoid), then a similar 5-year or so exit anywhere near $200 million would be an equity internal rate of return (IRR) in the range of 60%, even allowing significant margin-of-error.

Given the actual revenue & prospective growth, successive increasing tranches of Working Capital debt rolling forward could preclude the need for any dilutive equity, and would avoid the tedious, expensive, time-consuming legal and regulatory overhead of equity financing. Even the most expensive private debt would be a fraction of the 60% IRR, providing a substantial cushion for any shortfall of that projection.

When these options are available, the evaluation is Basic Accounting 101: Hurdle Rate. Measure the Cost of Capital versus the Opportunity Cost and allow a margin of safety. Opportunity Cost, with a cushion, becomes the Go/No-Go Hurdle Rate. Any lesser cost points to the economically correct option. Given a prospective IRR in the 60% range as Opportunity Cost, even the most expensive creative Working Capital would be less than half that. A compelling case for debt vs equity.

This matter was raised with management. Clearly, it had not been considered. After some discussion, it was apparent that management wanted to stay with the same equity-oriented strategy that had funded their earlier success, seemingly more as a comfort zone decision than one based on focused evaluation.

On the one hand, we have to congratulate this team for the demonstrated success to-date. On the other hand, we see a management possibly locked into old patterns and not able to grow with their success. Both observations submitted for your contemplation.

The Bottom Line

Both “Texas Whiz” and “Bottled Energy” remind us that success in growth finance isn’t just about securing capital. It’s about choosing it wisely. The right funding source depends less on enthusiasm or habit and more on honest analysis of stage, risk, and return. One company, still climbing toward stability, represents the reality that equity capital is sometimes the only fuel for early flight. The other, already cruising on momentum, illustrates how misplaced comfort with equity can dilute success unnecessarily. In the end, the smartest management teams are those that evolve their capital strategy as their business matures, matching each phase of growth with the funding vehicle that gets them farther, faster, and with the least drag.

A Message from Our Partner

Omni Capital Corporation specializes in Private Credit Solutions for Small and Midcap Revenue-Producing Growth Companies. Omni offers 3 Non-Dilutive Strategies which can generally provide funding within 7 days for companies, public or private, with qualifying profiles. Sector-agnostic funding, “it’s all in the numbers.”

• Revenue-Based Financing (RBF): Minimum 12 months revenue history, $100K/month. US-based companies. Ideal as Working/Growth/Bridge Capital to execute, and get to the next level. $100K-$15 million. Sector-agnostic. No collateral, no PGs, not MCA.

• Invoice Financing: Turn current Accounts Receivable into immediate cash. US and Canadian companies. $250K-$100 million. Ideal for cash to execute, get to the next level, and take on new opportunities utilizing an existing resource.

• Purchase Order (PO) Financing: Coupled with Invoice Financing. Do you have a business opportunity with a creditworthy customer, an established product channel, or a need for capital to produce? Requires established products and reliable counterparties, but a great way to grow your business without selling equity or an asset. Terms based on particulars. $250K and up, no limit.

About the Author

Robert S Darbee is the CEO of the New York advisory, Omni Capital Corporation. He is former President, The Bank of New York Trust Company, institutional investment arm of the parent.

If you have a question prompted by this commentary, feel free to email Bob at rsd@omni99.com, whether it's simply a question or an inquiry about possible funding, as described here. Include “TCLM” in the subject line.

Editorial Opportunities:

Have insights to share? Get featured in TCLM. Contact us about contributing!

Advertising Opportunities:

Your audience is here: thousands of corporate trade credit, treasury, and finance professionals. TCLM is where quote-to-cash decision-makers engage with the latest trends and insights. Put your brand in front of the right people at the right time. Advertise with us!