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If business A can't borrow money at any price, and business B can effectively borrow unlimited amounts of money for free, then how is it counter to all economic

If business A can't borrow money at any price, and business B can effectively borrow unlimited amounts of money for free, then how is it counter to all economic intuition than business B would have an advantage over business A?

garmaine 8y ago
Generally speaking startups don't borrow money to finance themselves.
- thinkingkong 8y ago
  Thats completely untrue. They just dont borrow money from a traditional bank. Lots of growth is actually fueled by debt.
  - navigatesol 8y ago
    >They just dont borrow money from a traditional bank. I'd go a step further and say the vast majority of startups borrow money from traditional banks, through home equity, business loans or credit cards. The startup world is far larger than the stuff we read about on Demo Day.
- Alex3917 8y ago
  Because they can't. Most people would be far less inclined to sell equity in their company if they could get a loan on fair terms that wasn't secured by their personal assets. If you watch the videos on Sweetbridge, reducing the WACC for startups and small businesses is one of the main promises of DLT.
  - navigatesol 8y ago
    >if they could get a loan on fair terms that wasn't secured by their personal assets. What constitutes a "fair rate", though? Despite popular opinion, banks are pretty damn good at assessing risk. The fact of the matter is, most small business fails. The rates reflect that. Sweetbridge looks interesting, but the risk falls somewhere, even if more diffuse.
    - Alex3917 8y ago
      > The fact of the matter is, most small business fails. The rates reflect that. OK but if you look at only the small businesses that are going to go on to succeed and be around for the next couple hundred years, they still can't borrow at the same rates as Apple or whatever.
      - AnimalMuppet 8y ago
        Because nobody knows which ones they are. If the banks knew which small businesses would be around for a couple hundred years, those small businesses could probably borrow rather cheaply today.
        Alex3917 8y ago
        > Because nobody knows which ones they are. This is obviously correct. But it contradicts the idea that banks are good at assessing risk, if the closest that banks can come is lumping 100% of startups into a 'startup' bucket. If banks really were good at assessing risk then the fact that the large tech companies have access to cheap capital wouldn't necessarily hurt startups, but that isn't actually the case.
        AnimalMuppet 8y ago
        Banks can be good at assessing risk in general, and still be bad at assessing risk of startups. Nobody is good at assessing risk of startups.
  - charlesdm 8y ago
    Traditional banks aren't in the business of taking risks. That's not their function. They exist to finance things and that is why their upside is mostly limited. I've personally experienced this recently trying to borrow money to acquire an asset: banks will throw money at you hand over fist, at amazingly cheap rates, if you structure things so that it's very very unlikely they will lose their money. If you set up a company tomorrow with no assets, no cashflow, no nothing. Just an idea. And you go ask for a $100,000 loan. Why should a bank give you a loan, given most businesses fail? It's 10 to 100x more risky to give a loan to a startup like that, than it is to give a loan to a profitable business that has existing cashflow and profits. Even if the interest rate is 20% for the startup and 3% for the established company.
- jldugger 8y ago
  Depends on how you view borrowing. They don't get access to fixed rates, and have to sell off promises of future revenue in exchange for money up front instead. It's all financing in the end, whether you get it from bond issuance or equity issuance.
JamesBarney 8y ago
Of course all things being equal a company that can borrow effectively unlimited amounts of money for free has an advantage or one that can't borrow. But specifically how does that relate to start-ups and hurting growth?

garmaine 8y ago

Generally speaking startups don't borrow money to finance themselves.

thinkingkong 8y ago
Thats completely untrue. They just dont borrow money from a traditional bank. Lots of growth is actually fueled by debt.
- navigatesol 8y ago
  >They just dont borrow money from a traditional bank. I'd go a step further and say the vast majority of startups borrow money from traditional banks, through home equity, business loans or credit cards. The startup world is far larger than the stuff we read about on Demo Day.
Alex3917 8y ago
Because they can't. Most people would be far less inclined to sell equity in their company if they could get a loan on fair terms that wasn't secured by their personal assets. If you watch the videos on Sweetbridge, reducing the WACC for startups and small businesses is one of the main promises of DLT.
- navigatesol 8y ago
  >if they could get a loan on fair terms that wasn't secured by their personal assets. What constitutes a "fair rate", though? Despite popular opinion, banks are pretty damn good at assessing risk. The fact of the matter is, most small business fails. The rates reflect that. Sweetbridge looks interesting, but the risk falls somewhere, even if more diffuse.
  - Alex3917 8y ago
    > The fact of the matter is, most small business fails. The rates reflect that. OK but if you look at only the small businesses that are going to go on to succeed and be around for the next couple hundred years, they still can't borrow at the same rates as Apple or whatever.
    - AnimalMuppet 8y ago
      Because nobody knows which ones they are. If the banks knew which small businesses would be around for a couple hundred years, those small businesses could probably borrow rather cheaply today.
      - Alex3917 8y ago
        > Because nobody knows which ones they are. This is obviously correct. But it contradicts the idea that banks are good at assessing risk, if the closest that banks can come is lumping 100% of startups into a 'startup' bucket. If banks really were good at assessing risk then the fact that the large tech companies have access to cheap capital wouldn't necessarily hurt startups, but that isn't actually the case.
        AnimalMuppet 8y ago
        Banks can be good at assessing risk in general, and still be bad at assessing risk of startups. Nobody is good at assessing risk of startups.
- charlesdm 8y ago
  Traditional banks aren't in the business of taking risks. That's not their function. They exist to finance things and that is why their upside is mostly limited. I've personally experienced this recently trying to borrow money to acquire an asset: banks will throw money at you hand over fist, at amazingly cheap rates, if you structure things so that it's very very unlikely they will lose their money. If you set up a company tomorrow with no assets, no cashflow, no nothing. Just an idea. And you go ask for a $100,000 loan. Why should a bank give you a loan, given most businesses fail? It's 10 to 100x more risky to give a loan to a startup like that, than it is to give a loan to a profitable business that has existing cashflow and profits. Even if the interest rate is 20% for the startup and 3% for the established company.
jldugger 8y ago
Depends on how you view borrowing. They don't get access to fixed rates, and have to sell off promises of future revenue in exchange for money up front instead. It's all financing in the end, whether you get it from bond issuance or equity issuance.

JamesBarney 8y ago

Of course all things being equal a company that can borrow effectively unlimited amounts of money for free has an advantage or one that can't borrow. But specifically how does that relate to start-ups and hurting growth?