

Ask news.yc: Raising money using bank loans? - cirroc

I'm interested in hearing any thoughts that some of the other Hacker News readers on starting a company using loans, and who might be the best places to approach? <p>We're a small team, about 70% of the way through a fairly hefty project. We've done most of the back-end code, but we need to contract some artwork, and want to move one of our co-founders to working FT on the project, in order to speed up development.<p>SBC style loans are offered by Citizen's bank and others- 
These loans, as I understand, typically require that you invest 30% of the loan amount into the company at the time of the loan.
 While we've invested quite a sum over the last few months as we've been building (legal fees, etc), I don't have a huge amount of up-front capital.<p>There's private sources of capital such as America One (amone.com), but they seem very shady, and want a high percentage as a finder's fee.<p>I know we could end up going to Angel Investors asking for a loan, but we don't know any personally, and building lengthy presentations for investor meetings takes time away from actually building things, as well as dilluting capital. <p>We're very dedicated to the idea, and the company, and I'd appreciate any advice, thoughts, or experience as other people have gone through this part of the process.

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SwellJoe
Banks are for houses and sometimes cars. They might be for restaurants and
brick-and-mortar businesses, but I don't think it's a wise idea, since those
also fail. They are not for technology startup companies, and not just because
they don't want to loan you money.

There are angels who will give you convertible debt at reasonable terms, if
they like what you're doing. But, it's probably wise to give up a little
equity to get someone with some money savvy working towards your success, and
that's one of the benefits of raising money from investors that work with tech
startups.

In short: Banks don't want you, and you don't want them. Debt is bad for you.

~~~
cirroc
Alright- You seem to be in the consensus on the news.yc board, and I'm coming
around to your viewpoint. That being said, what are the alternatives? I'm
already working 65 hours a week on my primary job, which I need to pay rent
and the server costs, art costs, etc for the startup.. Then I'm putting in
another 30-35 a week on the startup (12 on Sat + 12 on Sun + 4ish Tues-Wed-
Thurs)..

I can't really take another job- I just don't have time to do that, and
actually code anything. Approaching AAs is hard, since the product isn't as
"Sexy" as a lot of things. It's likely to a good few hundred K per year after
we get it going, but it's not the next Microsoft.

Do you have any ideas on where else to look? Is there something outside the AA
route, or even a sub-niche within in we should look at?

~~~
asmosoinio
Whoa, you work a lot! I would never manage that. Currently working maybe 30-40
hours a week on our start-up (or maybe spin-off would be a more appropriate
term), and I feel I could not really be that productive for much more hours
per week.

Of course I am often processing the problems in the background while doing
something else...

~~~
cirroc
The hard part of working that much is trying to balance work and Family.
Mostly I've given up sleeping- I know it's not ideal, but I'm down to 3-4
hours a night.

In full honestly, the 65 hour figure only comes in when I include travel time.
(about 2 hours/day)

My typical day is:

Get up at 5am, and head to work. Work from 6-4, then head home. Drive home.
Family stuff from 5-7 until my partner gets out of work. 7-1, Startup stuff.

1-5, sleep.

On the weekends, I try to get a bit more family stuff in, but then I usually
end up going to work for another 3-4 hours on Sat/Sun, and put in the rest of
the day on the startup.

I wish I had time for a 2nd job, but, really, the startup is the 2nd.. and the
3rd. ;)

I'd love any ideas to raise additional money for the startup- If we could work
on it full-time, we'd really be doing something special.

------
pg
A bank would value a startup at zero, and thus expect you to put up your
personal assets as collateral. That would be a big mistake.

It's because banks can't evaluate startups that venture investors exist.

~~~
cirroc
That's fair, but at the same time, I'm hesitant to agree, on a few ground-

1) You're certainly right that banks have nothing to go on. My credit isn't
amazing, but its certainly decent enough that I could probably manage a small
loan from the banks on personal credit alone. It would provide a few months
float money, at the least.

2) You've argued heavily before that there needs to be an element of becoming
personally committed[1], providing motivation. Having a Personal Loan over
your head is certainly one way to do that.

3) Are there other options? Raising Angel money would be more difficult for us
that for some projects, because we're not as Sexy as we could be.. We sent in
a yCombinator proposal that was very ambitious, but were rejected, so we
scaled back to what we thought we could achieve on our own.

We're doing a pretty decent job on it, but its not going to be the next
Google, or even the next Scribd. Most Angel Investors seem likely to want to
back a sexier horse, so to speak.

We do have a dedicated group of users waiting to sign up for paid
subscriptions, and we know we could hit profitability reasonably quickly, but
how do we get from here to there?

[1] <http://www.paulgraham.com/die.html>

~~~
jsjenkins168
1) I'm sure you can find a way to get some sort of bank to lend you money
regardless of your credit rating. There are plenty of banks in the business
lending money in high-risk situations. Getting the money probably isnt the
problem.

2) I see your point, but the problem with being in debt is that it is
something you don't have control over or can easily fix. Having a collections
agency call you all of the time threatening to repo your personal possessions
is not exactly a positive motivator either. I would rather run out of money
and be piss poor than have an unpaid loan over my head, personally.

3) Raising angel money is extremely hard I'm finding... This is a huge benefit
of YC, IMHO. Guy Kawasaki said in one of his books that you are more likely to
get struck by lightening than land VC funding. That quote is not as ridiculous
as I once thought..

Thats awesome you've got dedicated users, keep it up. Aim for the sky though,
dont tell yourself you wont be the next Google b/c if you think that way you
surely wont be.

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BrandonM
I'm certainly no expert, but if you have (almost) guaranteed cash flow within
some window that will make paying off the debt not a problem at all, I see no
problem with taking on some temporary debt. Obviously, you are heavily
investing your own funds at the moment, anyways, so what difference does it
make if you put up some personal assets?

I can see a real benefit to using a loan in this situation, actually. It
should be easy to close a reasonably small loan quickly, you don't have to
give up any equity or worry about people trying to control what you do, and if
you are in the position where you feel like a short-term loan is enough to get
you over the hump to revenue, then you are probably on the path to success.

I do have two suggestions, however:

1\. Get your partner in on the loan somehow, too. No matter how much you trust
him/her, it's not really fair to you to expect you to take all that risk while
your partner takes on none.

2\. Reassess your situation and set reasonable expectations. How long will a
loan last for? Is that long enough to finish the brunt of the work? How long
until you start getting positive revenue (are you sure about your prospective
customers)? With all those factors in mind, is the loan a smart way to proceed
(i.e. an 80% chance that nothing will go wrong)?

~~~
cirroc
Very good point on getting the partner involved in the loan- I'd like to do
this, but I'm not sure how to. We have a Delaware corp set up, but since the
company doesn't have any credit, I don't know how it could take out the loan.

Perhaps the company could take out the loan, and we could both co-sign?

We're probably about 3 months from being at a point I'd feel comfortable
charging- If we got a 10K loan, we could probably cover this easy.

The problem comes in that if our estimates are off, we've made the world a lot
more painful for ourselves. We've had quite a few customers asking to pre-
register, but I don't like the quality of experience that would give.

I appreciate the advice, thanks.

~~~
BrandonM
I mostly was referring to having your partner cosign or put up some assets
himself, instead of you taking it all on yourself. Honestly, though, a lot can
happen in 3 months. Be careful not to get in over your head and get yourself
in a position where you're subject to financial hardship if something goes
wrong. Of course, a 10K loan isn't really that much, and split two ways, it
could be paid off inside of a year without too much trouble, so it doesn't
seem to me like your risk is too high.

That said, you might want to take a little bit more just to give yourselves
some leeway. That would allow you to use a portion of the loan to make the
initial few (6 or so?) payments. If you think you're going to need to support
your partner for 3 months full-time, I'd shoot more for 4, and allowing
yourself a full-time month (in case it becomes necessary) might not be bad,
either. Finally, I'd suggest using some of it for the operating costs you
mentioned, so that you can work your other job a little less and spend more
time on the startup.

One last suggestion: sit down for some time with your partner and discuss what
the loan will need to pay for, how much is needed, and how it is going to be
allocated. Leave part of it unallocated as a contingency fund. Discuss how to
split the responsibility for the debt in the event of a failure. In other
words, get everything on the table now so that there are no surprises down the
line.

------
jsjenkins168
I've been told explicitly by several people _not_ to finance an early stage
startup with debt. I second utnick's suggestion to try to find other ways to
make ends meet, until you can land some angel investment (in the form of
equity financing). Not only can debt ruin your life if the startup fails, but
a lot of debt can look bad on your books if you reach the point of looking for
outside investment.

I recently learned about Certified Capital Companies (CAPCOS), which are
government backed organizations that look like banks, but their investment
turns into equity like an Angel or VC investment. Apparently they are still
very conservative in their investments though, and may not have very desirable
terms. But at least this is better than taking on a lot of debt. I dont know
much about them, but they might be worth looking into if they are available in
your state.

~~~
cirroc
Hrmm.. Very fair points, both on outside investors, and on CAPCOS. With
outside investors, I know we'd get a better valuation if we could launch, and
start bringing in revanue before we go out knocking on doors. Investing in a
dream and a codebase is one thing, but seeing the numbers on paper has to
help.

------
rms
I don't think you can get an ordinary bank loan without some real cash flow.

~~~
cirroc
You can if you put your personal assets and reputation at stake instead. To a
degree, this is what you're doing in a startup anyway. You're putting your
money, time and energy on the line, and hoping for a reasonable return on
that.

Granted, you may be right in that it's not worth it for many projects. The
project we're working on isn't as sexy as some though, and is unlikely to take
over the world. What it does have is a moderate number (300ish) of users ready
to sign on as paying customers at launch, and a good chance to tripling that
within 6 months. Those aren't retire to Tahiti numbers, but they're enough to
pay for dev.

Those sort of numbers make it hard to approach most AAs, who want to see a
10:1 investment:return

------
rwebb
I've heard good things about Chase small business loans. This looks like a
good resource for info on lots of banks:

<http://www.pcmag.com/article2/0,1759,5837,00.asp>

Interest free credit cards are an easy way to go as well. 1 year interest free
and then you can switch it to another card or take out a loan from your bank
directly with a fixed rate and pay off the card.

~~~
cirroc
Thanks- That's certainly an avenue I'll look into.. It looks like they do the
SBA loans that I had mentioned, but also do their own private loans, which
might be an option.

We have two people in our team- If I could get a Chase loan to allow our lead
coder to go full-time, and keep my job to make the payments, we could be OK
until launch.

It's not optimal, but it might let us get the time we need to launch
successfully and quickly.

I'm very open to any other ideas, and appreciate the discussion.

------
buss
I'd also recommend against getting a loan. Finding an investor might be more
effort, but you really don't want the added pressure of possibly losing your
personal assets as well as everything else if your business tanks.

~~~
cirroc
Fair point, but we need to do something. I'd love any ideas- We're Mass based,
and we've got the code about 80 percent done, depending on how you count.
We've got users who are ready to pay when we launch, and we've got a decent
potential for growth, but we know we're unlikely to be the next Google with
this project.

In some ways, we're working to get the bugs out of our Engines, and working on
our bona fides, so we can buy google with the proceeds from out NEXT project
;)

~~~
anamax
> We've got users who are ready to pay when we launch

How long (both money and time) are you from being able to launch? How many
users are ready to pay and how much?

There are answers to those questions that imply that you can get money the
money that you need now by offering said users a discount or longer
subscription time if they pay now for your service when it's ready.

~~~
cirroc
I know we could (They've offered), but I think it's a pretty terrible user
experience.

Essentially, they'd be pre-ordering based on trust in us, with nothing to show
for it. I'd be happy to give them an extended subscription, but I feel like it
would feel cheap, and make us look bad, not to mention that it would be a
pretty frustrating experience for them.

I agree with the idea, I just don't think it can be made to work in a classy
way.

~~~
anamax
Why are you arguing with your customers about what they want?

That's a hard argument to make if you're correct, but you're not - they are.
It's an incredible user experience. It lets them in on the excitement. It
gives them a story to tell others. That's why they want in.

And no, it's not "cheap" to give them a discount, it's rewarding them for
faith and it's fair. (You can think of it as interest if you'd like.) It's
also fairly standard practice.

Do it right, and they'll be out there selling more "pre-release" subscriptions
for you. Deliver, and they'll be your best salesfolk.

Of course, it is poor form to take their money if you're not going to deliver.

------
utnick
Probably a bad idea unless you already have cash flow. Getting into debt could
ruin you for life.

It doesn't sound like you need that much money.

Work on reducing your expenses/taking 2nd jobs instead.

