Yes, of course the bank or venture lender will loan money to a start up with no revenues. However, the company must be venture capital backed. A Startup Lender, like a bank or fund, cannot fund the company on their own. They are really lending against the equity that the venture-capital fund has put into the company and the progress the start up will make off of that equity.
Startup Lenders are generally lending against the ability of the start up to raise more capital 12 to 18 months down the road. It’s called future funding risk. If the lender believes the company will have significant traction or significant IP that will allow it to raise more equity capital, then the lender is willing to take the risk.
Some people believe that lenders will always write checks if there is a bunch of venture capital equity in the company. The thinking is that the VCs will always bail out the lender so the lender is not taking any risk. However this is absolutely false. Venture capitalists bail on start ups all the time, leaving the lender to clean up, sell the company and take a loss. It’s nothing personal between the VC and the Lender, it’s just the VC can’t throw good money after bad. The VC has often lost a ton of money in the company by this point so it’s understandable.
The big takeaway is that a startup lender cannot just rely on the VC’s to pay them back when the startup struggles, because they won’t. The company must be exhibiting traction and be able to attract another round of equity. If the next round looks promising, the banks and debt funds will lend.
Another place to be careful when you are an early-stage company is with your credit card. Not all credit cards “get” venture funded companies, so you need to be careful which you pick. One in particular has been really great for funded companies, Brex. My team and I rated the top startup credit cards - find the one that works best for you!
Important information startups should know about the March 2020 COVID stimulus is now in The US Startup CARES ACT page by Kruze Consulting.
Vanessa Kruze, a seasoned CPA, has an impressive track record prior to establishing Kruze Consulting. Her experience includes pivotal roles at Deloitte Tax and as a controller for a substantial startup with over 120 employees and $20 million in revenue. Under her leadership, Kruze Consulting has emerged as a distinguished CPA firm, recognized on the Inc 5000 list for five consecutive years, illustrating rapid growth and success in the competitive accounting landscape. Vanessa's unique approach, combining deep industry knowledge with advanced automation and software solutions, has positioned her firm as a leader in providing comprehensive accounting services to startups across the United States.
