Although the start-up ecosystem in Europe has improved in the last few years, it’s generally still harder to obtain funding in Europe than in Silicon Valley, that is unless you live in London, Berlin or Paris. Therefore, some funders might instead consider a more traditional European way to finance their business.
For instance, trying to obtain a loan to start a franchise business or real estate development is usually a good idea, whereas trying to obtain a loan to start an unproven business, is in most cases, a very bad idea. Anyhow, many European banks will not grant loans to start-ups anymore as they are highly risk averse, but there are exceptions, as some countries have start-up programmes that, in reality, grant you loans. My home country, Austria, is one example of this. As a start-up, you obtain a bank loan that is guaranteed by a government-owned agency (once they approve your business plan). I once made the mistake and took out one of these loans. At the beginning, I was very exited to get the loan approved and to get the money. But at the end of the day, I learnt the hard way that the whole system works just the same way as a traditional loan and one day you will have to start paying back the loan. And if you cannot pay it back, you are typically done, no matter how much potential your business has. In such scenarios, the bank even has a big interest in declaring your business bankrupt. Only in that way will they get back their loan from the government agency and if they miss that and grant you further loans, they risk the local law calling those loans equity. Which they are very careful to avoid.
It is always true, of course, that it is better to have enough cash to survive, even with debts, than to have no business and no debt at all. But be very careful with loans! And, at least for my part, I would never again take out a loan in the early stage of a start-up. In the later stages, when you are highly profitable, well that’s a different story, but at the beginning, believe me, it’s poison!