Money-losing tech companies borrowed billions of dollars against the promise of runaway growth from lenders with looser standards. The bill is now com

Bill comes due for money-losing tech companies that borrowed billions

submited by

Style Pass

2024-04-30 18:30:11

Money-losing tech companies borrowed billions of dollars against the promise of runaway growth from lenders with looser standards. The bill is now coming due.

Loans based on revenue, rather than on profits, were the voguish financial products of 2021 and 2022, on top of the hand-over-first venture capital unleashed by the pandemic. Private credit funds eager to put their money piles to work replaced a bedrock of lending — cash flow is king — with a Silicon Valley embrace of quick growth, sticky subscriptions, and roaring stock markets.

These loans based on “annualized recurring revenue,” or ARR, generally carried tripwires that required borrowers to turn a profit within two or three years or risk a default that could tip them into bankruptcy. Lenders assumed companies would keep growing and that debt would stay cheap and plentiful. Worst-case scenario, an IPO market that seemed to take all comers would bring in fresh cash to repay them.

Rising interest rates have made these loans more expensive, at the same time that tech-company growth has stalled out. IPO markets that shut in 2022 haven’t reopened, leaving companies relying on private money that’s stuck in its own pencils-down funk.