Debt funding has probably existed since the beginning of time. Shoe Dog, the memoir of Phil Knight, the founder of Nike, essentially debt funded his business with the banker down the street. As the business grew, it needed more and more debt. The banker was sweating and probably not sleeping and Phil Knight wanted more and more debt so the business could grow. In the end, going public was the only option.
A lot has changed since
In the garment center, we used factors who would give you the OK on an order and by doing that ensure that you got your payment within 30 days or if the companies stiffed you, the factor would pay you the amount because they have validated the paper. Of course they took a cut of each order so the odds were in their favor.
States and cities are beginning to invest in start-ups along side of venture groups that meet their criteria from the vertical to female-founded companies. I get it but I am not convinced it makes any sense because the chances of the city or state getting into a good deal and actually seeing large returns or any at all seem slim.
Why couldn’t the city or states become debt funders of growing companies with big orders?. Let’s say a CPG company that just got into all of Walmart and needs to make the products could go to the city or state for debt loans. The FDIC gives it the sign-off and the city or state makes 3% on the transaction. That is clearly a way to put money into the city/state vs. just taxes.
It becomes a win-win for everyone. Businesses grow, they don’t give up equity to build products, they can hire more people and feed the economy and the city/state took part in making that happen while making some money at the same time just by loaning capital.
Funding the products vs the organization, spot on distinction.
Why couldn’t the city or states become debt funders of growing companies with big orders?. Let’s say a CPG company that just got into all of Walmart and needs to make the products could go to the city or state for debt loans. The FDIC gives it the sign-off and the city or state makes 3% on the transaction. That is clearly a way to put money into the city/state vs. just taxes.Btw – I think you mean the Fed not the FDIC. The fed would not do this it lends to banks. Now some other quasi government entity that could do this? Sure that would be possible. The government could raise money some other way (small chance but yes possible).Anyway the issue is not the money. Just like money is not the issue in angel investing or venture capital. Or money is not the issue in opening an Italian restaurant. The example that I like to use. An Italian restaurant is a good idea and a winner. But not only is the devil in the details but an Italian Restaurant is an execution problem not a ‘is it a good idea is there a demand or does it solve something’ problem. Or even about food. It’s getting it all to work and having people do their jobs and show up every day. That is the hard part. So the question is are you going to get people who work for the government of a grade high enough to make this work? Or are you going to get losers that work for the government that have no clue? You know the answer.Now is there a third party company that could provide the expertise? Yes. But then again would you give your expertise in angel investing to help the government use their money for angel investing?Similar to floor planning but for large ticket items is floor planning. This is how car dealers get to put so many cars on lots. Although with car dealers I think that has changed (not sure) because with many now the mfg. simply puts the cars out there on one dealers lot but allows other dealers to draw from that inventory (observational, did not read that anywhere but have seen it happen). I marveled about seeing Marcus Lemonis lick his chops about investing in a business that I knew a great deal about (the sign business I think). He thought it was all about sales. It’s not. The sales are the really easy part. The hard part is having an organization (like a restaurant) where people show up and work is produced to the right quality. The reason sales is not the issue is because the other guy is always screwing up an order in some way (gross exaggeration to make a point).
This is a topic very close to my heart.Debt issuance in smaller businesses, unprofitable businesses, non-traditional channels, smaller boutiques, new startups, all need better underwriting and better understanding.Old monolithic business credit systems deserve to die.Understanding new forms of cashflow, underwriting with correct risk factors, making advances at a reasonable rate risk-adjusted, making sure you have the correct information all makes a difference.There is a potential market where $200-300k equity slug kicks off the business but $500-700k of debt at a 9-15% per year interest makes better sense – one that starts with 25-50k and grows as the business grows.Having accounting, supply chain, finance and sales / receivables all interlinked on a realtime basis helps alleviate any kind of bad signalling. There is tech to build this all.
Agree.Loved Shoe Dog btw.
When working w Walmart the margin is so thin than the 3% could kill you. Would rather not do the deal
I don’t like governments investing directly into startups in any way shape or form. They can create a lot of disincentives. Very different from a government pension fund investing in an independent VC/PE fund. Better to lower taxes, create an environment where there are low regs an opportunity to take risk.