Many Startups are Borrowing Money these Days – Why?

Whether you’re taking on debt or, seeking investors - does it really matter?

According to Lizette Chapman at Bloomberg, venture capitalists invested more than $79 billion in start-ups at "often unsustainable valuations" in 2015. Venture capitalists, recognizing the problem, were more conservative in 2016. As a result, the market for equity investments has dropped 10 percent from its high point in 2015.

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Therefore, startups in the US are having a harder time finding investors, or they don't want to enter into equity deals, so they've turned to financing their projects with debt instead. They'd rather owe bank their simple payments, rather than be indebted to investors that may want to be decision makers, or act as micro-managers to protect their investments. Debt from a lender allows for low interest rates, and less risk for dilution. As such, debt activity increased last year with lenders reporting an increase up to 25%.

There are risks of course, interest rates can get high (up to 15 percent) and the terms will weigh heavily towards the lenders. Depending on where you're getting your loan, financial covenants can be strict with receiving information on rate of growth and expectations of profit. If a startup runs into cash flow problems, a lender doesn't benefit. Regardless of the risks, the trend towards startup financing with debt over equity is expected to continue in 2017.

So, whether you're choosing to seek investors, or get a business loan, how can you ensure that your startup won't fail? Working with a digital agency that can build your product, create your online presence, and successfully market your business as well is paramount. Thankfully, we can help.