Startup Debt Financing

In debt financing, there’s no exchange of money for shares or equity. 

Instead, the startup collects loans i.e. gets investors to invest in exchange for a return on the capital, and a pre-agreed interest rate. 

Continuing with our farmland analogy, rather than paying for a portion of the farm, investors give the farm holders money on the condition that the farm holders pay back what they owe and an agreed-upon interest. 

The investors’ profit is not tied to how many shares they have, but how much they agreed on with the startups. In debt financing, there is an obligation for startups to repay; if a startup is unable to pay, whatever collateral they put down will be claimed by the investors.