Financing Follies for Startups

A few weeks ago, I came across something interesting in my inbox from the Go Big Network. If you're not familiar with it, it's a place where startups, investors, and people looking to join investors can connect up, recruit one another, and generally get a bit of exposure.

They also have a regular newsletter that goes out covering different issues and that's where this post kicks off.

In case you didn't know… sometimes in a new business, money is tight. Very tight. As in "omg, can we pay the bills this month!?" tight. Therefore, startup owners almost always have to get their hands on outside sources of money… in the mISV realm, this could be custom development. In other areas, this could be investors, friends & family, a second mortgage or even – ye gods, no! – credit cards. Those options get more and more expensive as you go to the point where using credit cards can be downright suffocating. But for those of you who aren't happy with those interest rates, you can go even higher with a Merchant Cash Advance.

Click the above image to see Go Big Network's pitch. 

If you're not familiar with them, it's quite simple. It's effectively a Pay Day Loan. You have some money coming from customers, etc later on, but you need money now. Therefore, you take a loan against those Accounts Receivable (or future credit card transactions) and get the cash now. Of course, the rates are higher… I've seen 20-25% but I suspect they can (and do) go higher.

While there definitely is a place for these sorts of loans, they are a terrible idea for startups.

If you run a restaurant and can track your sales on a day to day basis and can see a benefit from one of these loans – like buying a new oven – then they could make sense and not wipe you out. In a startup… until you have customers… you're taking a huge risk. A ridiculously huge risk against future revenue that you might not have.

Let's face it. The technology realm is fickle and difficult to navigate. You're already taking risks that terrify most people and can wipe you out if you're not careful. Why would you want to add a 20%+ loan on top of everything? Don't you have enough to deal with? Don't you have enough things pulling your attention? Can't you get a better rate somewhere?

I don't have all the answers and I don't pretend to… but this just seems to be a Bad Idea(tm).

Personally, I think it's borderline irresponsible for Go Big Network to endorse these types of loans to startups.