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The very premise of the article: "With fewer companies getting funded these days, many startups are opting to borrow money instead. " Leaves some serious fina

The very premise of the article: "With fewer companies getting funded these days, many startups are opting to borrow money instead. " Leaves some serious financial issues. Generally speaking - if you could raise debt, you wouldn't ever want to raise equity. The whole point of raising equity surrounds the fact that there's too much risk for debt. If you can get good terms on a deal, and are not too leveraged, then every VC should be wanting the company to have debt in lieu of equity. Why would anyone want to dilute if they don't have to? What on earth are these startups using as collateral? Equipment? Receivables? And given the likelihood of a startup going bust, why are banks even offering debt, at any price? I can definitely understand a 'bridge loan' for some financial operation - or even holding off for better valuations ... or again, some kind of low-leverage on solid receivables for an SaaS or something ... If someone has some experience with this, maybe they can chime in?

codelitt 10y ago
Debt financing is usually massively cheaper than equity financing. If you need working capital and can pay back loans with decent terms, then you should almost always prefer debt. I could be wrong, but I get the impression startups either don't understand how to leverage debt or it's just not sexy. No one gets a TechCrunch article written about their new 500k loan from Wells Fargo that they need for working capital. VCs aren't exactly keen on revenue producing startups going to a bank instead of them either. Another possibility could be they are no where near to producing the revenue needed to make payments or pay off a loan and equity has no hard deadline or immediate revenue requirements. Unfortunately, that's kind of a terrible cycle as a company with cheap debt and revenue is likely to be built on better fundamentals than one that has no idea when it will have revenue.
- edblarney 10y ago
  "could be they are no where near to producing the revenue needed to make payments or pay off a loan a" ---> Then there is no way they could feasibly get any debt. That's the odd part of all of this.
  - codelitt 10y ago
    Good point. That part doesn't make any sense. I guess what lenders we're doing before the recession in the housing market didn't make sense either though.

codelitt 10y ago

Debt financing is usually massively cheaper than equity financing. If you need working capital and can pay back loans with decent terms, then you should almost always prefer debt. I could be wrong, but I get the impression startups either don't understand how to leverage debt or it's just not sexy. No one gets a TechCrunch article written about their new 500k loan from Wells Fargo that they need for working capital. VCs aren't exactly keen on revenue producing startups going to a bank instead of them either. Another possibility could be they are no where near to producing the revenue needed to make payments or pay off a loan and equity has no hard deadline or immediate revenue requirements. Unfortunately, that's kind of a terrible cycle as a company with cheap debt and revenue is likely to be built on better fundamentals than one that has no idea when it will have revenue.

edblarney 10y ago
"could be they are no where near to producing the revenue needed to make payments or pay off a loan a" ---> Then there is no way they could feasibly get any debt. That's the odd part of all of this.
- codelitt 10y ago
  Good point. That part doesn't make any sense. I guess what lenders we're doing before the recession in the housing market didn't make sense either though.