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Debt Financing and the Current State of Fintech

Equity rounds have been the main talk of the fintech industry in recent months, but that might be changing soon. A financial startup, Klarna, recently reported that they’ve been able to raise significant capital, although without any equity financing – instead, the company took that as a debt. A representative for Klarna stated that the organization is trying to diversify the sources of its funding and to establish a stronger capital base.

The Benefits of Debt Over Equity

Even though Klarna has not attempted anything like that before, the move itself is not an original one in the fintech industry as a whole. In fact, even some major players on the market have started to move away from equity for the funding of their operations, such as Airbnb which manage to raise $1 billion in debt financing. Some found that strange in the context of the $2 billion the company already has available, but it doesn’t seem like a bad move as far as funding diversification is concerned.

A Popular Solution in the Private Sector

Using debt funding is nothing new in the private sector, with many tech companies already being used to utilizing this instrument to improve their funding. This is a flexible approach that allows companies to scale up their operations more efficiently during periods of rapid growth, and to move on to better solutions once they’ve reached a state of sufficient maturity.

Uber is another example of a company that used debt financing successfully earlier in the year, with $1.6 billion raised in total. Facebook did something similar before the company went public, and the approach is not unknown to major banks who’re used to dealing with clients of this type.

Online Lenders Take a Different Approach

While debt financing is also a popular strategy among online lenders, many of them tend to approach the situation slightly differently. A typical application of that tool in the industry is to gain access to more funds for immediate lending, something which can help the company avoid having to lend their own equity and have debt relief.

In the end, using regular debt to finance the growth of a new company is not that common in this sector, and it’s a relatively unusual concept in fintech in general. It remains to be seen whether it will stabilize as a more popular idea or if companies are going to seek out alternatives at some point.

In the case of Klarna, the company is already reporting solid profits and it’s been evaluated positively by Swedish media, with its latest rating placing it at $2.25 billion following a major investment. This is a positive sign for the industry as well as for those looking to finance their own companies through the clever use of debt, although each case should be studied individually to avoid falling for some common issues.

Another factor that many are curious about at the moment is how this could impact the domestic market and whether it will spill over to that area as well, something which many expect may not be too far off.

 

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