Regulatory costs that shape the round
Depending on your activities, you may need legal advice, an authorisation application, compliance and risk staff, systems for anti-money laundering checks and, for some firm types, regulatory capital held in the business. Equity investors will expect these costs in the plan, and the time to authorisation affects how long the money must last.
Equity versus lending facilities
If you lend money, using equity to fund the loan book is usually very expensive. Most lenders raise equity for the platform and a separate credit facility for loans, often starting with a smaller facility that grows with performance. Facility terms include pricing, how much of each loan the lender funds, eligibility criteria and performance triggers.
- Advance rate: the share of each loan the facility funds.
- Eligibility rules on which loans can be funded.
- Performance triggers that can stop new funding.
- The first-loss equity you must put in alongside.
Partner costs
Embedded and partner models reduce regulatory costs but share revenue with the regulated partner and may include minimum fees. Model these carefully, as they affect margin and valuation.
Investor terms to understand
Fintech investors sometimes ask for extra consent rights over regulatory decisions, new products or credit policy. Make sure these do not slow routine decisions, and understand how change-of-control rules with the regulator affect later investment.
Fintech funding types and what they pay for
| Funding type | Pays for | Key terms |
|---|---|---|
| Equity | Team, product, compliance, regulatory capital | Valuation, preferences, consent rights |
| Credit facility | Loan book | Advance rate, eligibility, triggers |
| Partner model | Faster launch | Revenue share, minimum fees |
Questions to prepare before you pitch
- How much of this round is needed for regulatory costs and capital?
- What consent rights will you have over credit or compliance decisions?
- Would your investment trigger change-of-control approval with the regulator?
- How do you expect us to fund the loan book as it grows?
How KJ Enterprises evaluates fintech businesses
KJ Enterprises considers fintech businesses that plan regulatory costs honestly and match equity and debt to the right uses. Our KJ Capital business gives us direct experience of AI in financial markets.
If that describes your company, you can apply for investment. Related reading: the complete funding guide and the step-by-step how-to.
Frequently asked questions
Should a lending startup use equity to fund loans?
Usually only at the very start. Most lenders move loan funding to a debt facility as soon as they have a performance track record.