Here is a very informative post on the subject of debt in a startup. Founders who are not necessarily trained in cash flow fundamentals will find here a solid introduction to a critical topic.
In his post Willy Braun reminds the key principle of debt: to consider present cash flow and anticipate future cash flow to calibrate the right amount of debt.
The article then takes the time to interpret this principle within a startup, where cash flow can be weak or non-existent and very difficult to anticipate.
Braun interviewed several bankers to find out how loan applications for unprofitable companies were handled and shares what he learned from them. He also takes the time to describe the essential notion of risk vs. reward and the reasons that can push Startups to take this financial risk.
The key principle of debt is to consider present cash flow and anticipate future cash flow to calibrate the right amount of debt. Think of money borrowed to buy a house: the maximum amount of money you will be able to repay will be directly linked to your future revenue. But what happens when a company (1) is generating no or low level of cash flow and (2) is very hard to predict?