In order to meet the specific needs of start-up companies, the State Bank of Pakistan (SBP) is working on a new type of loan scheme, taking into account the problems they face when raising capital in the form of convertible foreign debt.
According to a working paper issued by the State Bank on Tuesday entitled ‘Raising convertible debt from abroad by start-up companies,’ start-ups and venture capital firms argue that foreign investors intend to invest in their companies in the form of convertible debt (i.e. loan convertible into equity) rather than investing directly as equity while the current foreign exchange regulations remain in place.
Start-up companies also face financing problems due to collateral or security unavailability. Interest in start-ups is shown by foreign investors, including equity funds and angel investors. They attempt, however, to cover the risk by alternative means such as high loan returns, the SBP noted.
“In the form of convertible debt, a company may raise funds from abroad, i.e. the lender has the option of converting the loan into the equity of the borrowing company,” the SBP said.