Should Startups Seek Venture Capital or Borrow From Banks?

September 8, 2017

5:00 pm

The early stages of a startup are delicate, and the single largest destabilizing factor tends to be money. Even with a brilliant idea and hardworking team, a lack of funding can capsize small companies quickly. Crafty business owners looking to keep the momentum rolling have many options in front of them. They can seek angel investors such as friends and family, empty their personal savings accounts, or approach venture capital firms for seed money. The latter course was traditionally the most popular, but a more established method of funding is now staging a comeback.

Business loans are becoming more sought after by startups looking to continue their growth trajectory. While VC funding remains a path that many founders take, others are choosing business loans and realizing the same success. For those who are considering raising money, this makes it necessary to consider both options.

Loans Are Back, and Startups Love Them

Loans are an integral part of the economic infrastructure, helping millions get the funds they need, although small business loans have dropped 50 percent over the last 20 years. The technology boom of recent years, however, has led to venture capital replacing loans as startups’ main source of capital. Now, a tech revolution has brought the trend full circle. Achievements in fintech have made old-school business loans smarter and faster, thanks to powerful innovative technology and the support of financial regulators.

The mistrust in traditional financial services borne of the 2008 financial crisis saw the rise of several new industries, such as Lending-as-a-Service (LaaS). Instead of going to banks for loans, companies are turning to online lenders and LaaS providers. End-to-end automated finance solutions provider ezbob, for example, lets businesses find financing tailored to their needs. The savings these lenders gain from streamlined process are passed on to borrowers, and many are taking advantage.

According to Tomer Guriel, the company’s CEO, the decision to move to lending was part of developing an understanding on how banks operate.

“The idea of being a technology provider was born in 2012. At the time, we teamed with Accenture in order to sell our platform to banks. Unfortunately, at that time, the banks were not ready to work with a start-up/Fintech. The only way we could get the business off the ground was to start lending ourselves. After we signed our deal with RBS, we decided to pull back from lending so that we could concentrate on R&D. We plan to launch new products such as a consumer lending platform, a mortgage platform with the similar characteristics of our SME lending platform,” he said in a recent interview with Forbes.

But What About VCs?

Venture capital firms are undoubtedly an excellent way for startups to grow. In exchange for equity, founders gain a mentor and advocate at the firm–an industry leader who can often contribute expertise and clout in negotiations. This kind of collaboration could be useful as a company grows, but it is never a guaranteed win.

VC contracts involve complicated legal guidelines. Some even impose performance milestones on the team and other strict measures. VCs wield so much control thanks to the equity they control.  It might seem like a free way to get funding at first, but equity may equate to “mandatory advice.” More than just shares and profits, many startups end up ceding creative control as well. Not all VCs behave this way, but they are all profit-seekers at heart.

A New Generation of Startups

Savvy startup owners have the option to go around town knocking on the doors of every VC in the business, or they can take a step back and look at other options to grow a healthy business. Loans  can be a sensible option, but might seem intimidating because of the financials and paperwork required.

A loan is still a loan, and will still add liabilities to the balance sheet and affect cash flow. This might be difficult for a company without tangible sales, credit, or revenue. However, the enormous strides made by fintech have made it a much more enticing option. This is doubly true for founders who have read tales about their peers who lost a grip on their baby to VCs.

Thanks to cutting-edge technology, loans are now more inexpensive than before. Many do not require collateral and have easy standards on credit. Additionally, while 1 percent of equity may end up representing millions, a loan will always be a flat dollar rate. These simple agreements, in which the lending party is not interested in control, are perfect for certain people. Individualistic types strongly prefer this arrangement to compromising with VCs, but in the end (or the beginning), the choice always boils down to the founder.

Read more about raising capital at TechCo

Tags: ,

Did you like this article?

Get more delivered to your inbox just like it!

Sorry about that. Try these articles instead!

A New York native, currently dwelling in Berlin. Always been a Luddite, but now embracing the tech world and trying to make a name for myself as a tech journalist.

Leave a Reply

  • (will not be published)