Unfunded? Unless your credit is totally in the toilet, you can probably get a business credit line to launch on your own(work.com)
work.com
Unfunded? Unless your credit is totally in the toilet, you can probably get a business credit line to launch on your own
http://www.work.com/getting-a-business-line-of-credit-7/
12 comments
This seems like a really bad idea.
It's a bad idea for a typical Web 2.0 startup but it's a great idea if you have a clear path to profitability.
Debt is only reasonable if you already have enough positive cash flow (not positive revenues.. more money in than money out) to finance that debt.
But even if you have positive cashflow, it generally makes sense for young companies to reinvest those earnings instead of taking debt investment.
If your business fails, then you still need to pay off the loan. So that's what you get for not giving up your equity.
But even if you have positive cashflow, it generally makes sense for young companies to reinvest those earnings instead of taking debt investment.
If your business fails, then you still need to pay off the loan. So that's what you get for not giving up your equity.
"But even if you have positive cashflow, it generally makes sense for young companies to reinvest those earnings instead of taking debt investment."
Not necessarily - or rather, it's often rational to do both.
It's rational for a business to take out a loan if the interest rate of the loan is less than their expected return on capital. Interest rates for business loans are what, 6-8%? It's not uncommon for a well-run, growing business with a strong franchise to earn a ROC of about 25%.
Debt lets them grow faster, sooner, and then they can pay off the debt from future earnings. It's often far more capital-efficient than floating an equity offering, where the investors would get a share of all those additional profits.
It doesn't work for web startups because web startups often have far lumpier earnings. It's not uncommon for a web startup to be bought for multi-millions before they earn a dime of profit. That's because their real "customers" are big companies, who are paranoid about losing their market to an upstart. A web startups users are effectively an advertising expense: spend a few thousand on bandwidth to show that if you wanted, you could take over the world, and then get a big company to buy you to prevent that from happening.
There are some web startups that employ debt financing very effectively. For example, Akamai floated close to $300M of convertible bonds to fund its expansion. As a result, it effectively acquired a lock on the content-delivery business, which has allowed it to grow by leaps and bounds over the past 5 years. Without that debt financing, they'd either have to forgo their thousands of datacenters in strategically-placed locations, or they'd have diluted their equity so much that it wouldn't be worth it for them.
Not necessarily - or rather, it's often rational to do both.
It's rational for a business to take out a loan if the interest rate of the loan is less than their expected return on capital. Interest rates for business loans are what, 6-8%? It's not uncommon for a well-run, growing business with a strong franchise to earn a ROC of about 25%.
Debt lets them grow faster, sooner, and then they can pay off the debt from future earnings. It's often far more capital-efficient than floating an equity offering, where the investors would get a share of all those additional profits.
It doesn't work for web startups because web startups often have far lumpier earnings. It's not uncommon for a web startup to be bought for multi-millions before they earn a dime of profit. That's because their real "customers" are big companies, who are paranoid about losing their market to an upstart. A web startups users are effectively an advertising expense: spend a few thousand on bandwidth to show that if you wanted, you could take over the world, and then get a big company to buy you to prevent that from happening.
There are some web startups that employ debt financing very effectively. For example, Akamai floated close to $300M of convertible bonds to fund its expansion. As a result, it effectively acquired a lock on the content-delivery business, which has allowed it to grow by leaps and bounds over the past 5 years. Without that debt financing, they'd either have to forgo their thousands of datacenters in strategically-placed locations, or they'd have diluted their equity so much that it wouldn't be worth it for them.
If your company goes south for any of a million reasons, who gets stuck with the bill? If you've sold equity, you've spread out the risk according to who's willing to take it. It's likely the founders opted to risk time more than money, so they're not out anything huge. If you get a loan, somebody's gotta pay it back at the end of the day.
Unlikely, unless you have some idea that makes sense to a business loan manager. You're relying on a non-tech person to see that your idea is a really solid idea, which may or may not fly.
The other thing is that even if your credit isn't in the toilet, banks might also want to take a lien on something valuable of yours, e.g., your car or your house, since you essentially have no assets in your company when you start. This is not always in your best interest, especially if your company goes belly up. Liquidating a house or a car that might normally be protected by bankruptcy is probably not going to be fun for you.
The other thing is that even if your credit isn't in the toilet, banks might also want to take a lien on something valuable of yours, e.g., your car or your house, since you essentially have no assets in your company when you start. This is not always in your best interest, especially if your company goes belly up. Liquidating a house or a car that might normally be protected by bankruptcy is probably not going to be fun for you.
Not applicable for young web startups. Banks like lending to people and businesses with assets and revenues not ideas. Plus, if you take on debt you it makes it harder to cut and run if your idea doesn't pan out the way you planned.
I'm no expert but I distinctly remember Rahoul Seth say at Startup School NOT to fund with debt in the early stages. Fund with equity and try to stay debt free until after the seed and 1st VC round.
Reminded me of the supposed quote by Trump to his daughter upon seeing a homeless guy...it went something like "Technically, he is richer than I am."
Go for open source tool, learn them..use them, develop a solid business model and use this as a starter to showcase your skills. If its rock solid, you will get the recognition. Use this fame to seek out "real funds" to kick start your dream projects. Atleast thats what we are upto. Embracing open source and low cost solutions ensure you dont need a businesss credit line
Might as well fund your start-up with scratch off lotto tickets while you're at it.
It is in the interest of seed funders to encourage you not to fund yourself with debt. They want to ride the gravy train if you succeed.
It is in your interest not to fund yourself with debt. All probability suggests that there is no gravy train for you, just debt.