The State Bank of Pakistan (SBP) on Wednesday cleared a major hurdle stifling startup growth and allowed them to attract offshore loans such as convertibles.
The central bank said it had allowed startups to use loans as “convertible debt” to make it easier for startups to raise funds from abroad.
To borrow from foreign investors, the current law prohibits people from taking out such loans and allows Pakistani companies to do so under very limited circumstances. This limits the overall goal of convertible loans for beginners as the goal is to quickly raise money from existing investors.
Startups are required to approve foreign loans that can be converted into equity.
With successful start-ups, they step up their initial round of financing and start selling their product or service to their target customers. However, if there is higher growth, they need more funding, startups want to get loans from abroad, but state bank regulations become an obstacle in this case.
“Convertible bonds are a type of financing with options that can be converted into borrower’s shares with certain conditions,” said SBP.
Prior to the last instruction, companies were allowed to borrow foreign currency from abroad within the parameters set out in the Foreign Currency Manual (FEM), but there is no specific category in which such loans can be converted into equity. – smart.
Startups have funding problems due to a lack of collateral or collateral. Foreign investors, including equity funds and angel investors, are interested in startups but try to cover risks through alternative means such as high loan yields.