Is Debt Financing The New Big Equity Round In Fintech?

Photo credit: markus spiske via Visualhunt / CC BY

After months of reading about hefty equity rounds, financing trends in fintech may be changing. Klarna, a leading European payments upstart, said on Monday that it had raised 300 million crowns (it’s based in Sweden). The firm is, after all, a major player in Europe, handling about 10 percent of all online transactions, according to Reuters. But, perhaps a sign of the changing tide in startup land, instead of a big splashy equity financing, this one was done as debt.

“Klarna is picking up speed in year-on-year revenue growth because of success of recent product launches and markets expansion,” said Jesper Wigardt, Klarna’s PR manager, in an email to Tradestreaming. “We issued the inaugural capital market loan in order to diversify funding sources and to strengthen the capital base to support continued accelerated global growth.”

Why use debt when you can use equity?

This was Klarna’s first time dipping into debt markets, but other top private technology firms have turned away from equity to finance their operations. Earlier in June, Airbnb announced it had raised $1 billion in debt financing. Though the hospitality marketplace still has $2 billion banked, it turned to straight debt financing to add to its coffers.

For fintech firms, using straight debt is generally a new phenomenon. Up and coming financial technology firms have a variety of financing options and straight debt may prove to be a smart financial move.

“If a company is growing rapidly, and has sufficient cash flow, debt can be a more cost effective financing tool than giving up large percentages of equity,” remarked Kyle Zasky, a partner in fintech merchant bank, SenaHill Partners.

Private fintech firms don’t normally turn to debt markets

Private technology firms are accustomed to using various forms of debt to scale up. The most common, convertible debt, enables a young, upwardly mobile firm to raise money quickly without having to quibble over early-stage valuations. Using convertible debt, which turns into equity at a later financing round, startups and their investors can kick the valuation can down the road to a later-stage investor to set after the company has matured somewhat.