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Excellent answer- I wonder though why more start ups don't take out loans/issue debt? Is it simply because they can't find anyone willing to lend to them at re

Excellent answer- I wonder though why more start ups don't take out loans/issue debt? Is it simply because they can't find anyone willing to lend to them at reasonable interest rates? I would think a company like the one you describe would be a pretty good bet for a lender to give a loan to build a factory.

WhitneyLand 12y ago
They do, and there are companies setup to make those kind of loans but the parameters have to be just right. Also things like IP, or growth curve, can usually not be used as collateral. You start to need deep analysis of those assets and people willing to bet on them which is where VCs come in.
- ensignavenger 12y ago
  In the case the OP described above, I would think the factory would be pretty good collateral. For a software company that just wants to hire more staff, not so much :)
anigbrowl 12y ago
Thanks for all the nice comments! They do sometimes, but in recent years banks have been more reluctant to lend and issuing bonds typically involves an awful lot of legal overhead, so I think it's just easier to issue equity. Another reason is that if business doesn't go as well as you hope the debt might allow creditors to secure your secured assets/stock, whereas if you issue equity that's not an issue. Also, for early stage companies raising equity can be a good way to meet people you'd want on the board advising on the future direction of the firm. But you know I just know about this second hand from being into economics. If you search for 'capital formation' you'll find lots of stuff and some people like grellas here at HN are specialists in that.
- ensignavenger 12y ago
  Thanks again for another great answer. I can see where the legal/regulatory overhead for issuing debt could be a big roadblock. It is my understanding that a lot of early stage financing is 'convertible debt', with the idea to convert it into equity at a later time. I wonder how often start-ups decide to pay off this debt from revenue rather than allowing it to convert? Would that be a big no-no?
clay_to_n 12y ago
Personal loans are a great way to bootstrap a startup and can lead to you having more equity later on. But it can be hard to get a lot of capital this way, compared to raising from investors. It can also be riskier - taking out a $5mil loan from a bank is a bit scarier than raising $5m from venture capitalists who understand that 90% of their investments fail.

WhitneyLand 12y ago

They do, and there are companies setup to make those kind of loans but the parameters have to be just right. Also things like IP, or growth curve, can usually not be used as collateral. You start to need deep analysis of those assets and people willing to bet on them which is where VCs come in.

ensignavenger 12y ago
In the case the OP described above, I would think the factory would be pretty good collateral. For a software company that just wants to hire more staff, not so much :)

anigbrowl 12y ago

Thanks for all the nice comments! They do sometimes, but in recent years banks have been more reluctant to lend and issuing bonds typically involves an awful lot of legal overhead, so I think it's just easier to issue equity. Another reason is that if business doesn't go as well as you hope the debt might allow creditors to secure your secured assets/stock, whereas if you issue equity that's not an issue. Also, for early stage companies raising equity can be a good way to meet people you'd want on the board advising on the future direction of the firm. But you know I just know about this second hand from being into economics. If you search for 'capital formation' you'll find lots of stuff and some people like grellas here at HN are specialists in that.

ensignavenger 12y ago
Thanks again for another great answer. I can see where the legal/regulatory overhead for issuing debt could be a big roadblock. It is my understanding that a lot of early stage financing is 'convertible debt', with the idea to convert it into equity at a later time. I wonder how often start-ups decide to pay off this debt from revenue rather than allowing it to convert? Would that be a big no-no?

clay_to_n 12y ago

Personal loans are a great way to bootstrap a startup and can lead to you having more equity later on. But it can be hard to get a lot of capital this way, compared to raising from investors. It can also be riskier - taking out a $5mil loan from a bank is a bit scarier than raising $5m from venture capitalists who understand that 90% of their investments fail.