When Should You Consider Getting A Loan For Your Startup?

“This is the first time we’ve ever disagreed,” I said to Gill, one of the investors in my company. I had just told him that I wanted to get a loan for my company, and Gill, much to my surprise, was against the idea.

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“I know, Brett. I know,” Gill said. “My feeling is that Venture Capital is like jet fuel for a startup.

“A loan is like the exact opposite of jet fuel.

“Besides,” Gill said ominously, “Loans always come due at exactly the wrong time.”

Loans are great for extending your runway.

Two weeks prior to meeting with Gill, I was meeting with Tina, our awesome Controller, in our weekly Friday financial review meeting. In this meeting, Tina surprised me and said, “I think we should get a loan.”

“Really, what are you worried about? We have a year and a half of cash left in the bank,” I said.

“I know,” Tina replied. “However, we’re behind our (revenue) plan, and I think getting a loan will help us before we raise our next round (of funding).”

“Okay,” I said slowly. A loan was not something I was planning on doing, but I wanted to hear what Tina had to say.

“Let me show you,” Tina said as she opened up a spreadsheet on her computer. “Look what happens if we get a $3 million loan.”

I looked at the spreadsheet Tina prepared, and I said, “Wow, this gives us plenty of runway to hit our goals.”

“I’ve already ready spoken to a couple of banks I have relationships with, and I think we can get it (the loan) at really low rates and interest free for the first year. What do you think?”

“Do it,” I said.

Just like all forms of fundraising, it’s easiest to get a loan when you don’t need the money.

Two weeks later, I found myself presenting to Comerica Bank and Silicon Valley Bank about our company. I used the exact same pitch I did when I was presenting to VCs.

I knew that the bank would want to talk with our investors before the loan would be approved. So, I had to get Gill and our other investor, “Raul,” to approve the loan.

I met with Raul the day before I met with Gill. Raul immediately gave his approval for the loan.

Gill, as I said, was against the loan. However, Gill told me he would support the loan if I wanted to go forward. He also told me he had a strong relationship with SVB.

That’s what I loved about working with Gill. He believed it was the CEO’s show to run, and he was going to support me even if he disagreed with me.

A couple days later, we had approvals from both banks. There was no doubt that we had a good story to tell, and I’m sure that helped us get the approvals.

However, there were two other reasons the loan was approved. Our investors pledging their support of the company was critical. Without it, there was no way the loan would have been approved.

The other reason the loan was approved was we really didn’t the money. Tina’s foresight of seeing our financial future was critical. She could see what might be coming, and she wanted to act before it happened.

Now that we had two approvals, it was up to us to choose which bank to go with.

You want a bank that is business and startup friendly.

Tina and I reviewed the loans. The terms from both banks were similar. We really could have gone either way.

Tina and I decided to choose Silicon Valley bank because we felt they understood our business better, and they had a well earned reputation of being startup friendly. In other words, if we got in trouble, SVB wasn’t likely to pull the loan.

Little did we know how important SVB’s support would be.

In a crazy turn of events, Raul’s fund, “Donald Ventures,” decided not to support our next round of funding. At the eleventh hour, just when we were about to shut the company down, SVB put pressure on Donald Ventures to support the term sheet we received.

The loan with SVB ended up saving the company in a way no one could have ever seen coming.

For more on this crazy turn of events, read: https://www.brettjfox.com/what-happens-when-your-investors-give-up/

I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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