How do equity and debt change with rising interest rates? Caddi, Paytner, and non-bank deregulation discussed｜若林 StartUp×融資 – note（ノート）

I am Wakabayashi ( @wakaba_office ) from INQ, which supports startup financing.

I am discussing topics related to startup financing in the “Loan Consultation Room” segment of the YouTube program “Startup Investment TV,” operated by Gazelle Capital.

This article is a pody transcript of the content from “[Loans are the Norm] No Entrepreneur Should Go Without Borrowing by Series A: Learning from Caddi and Paytner on Debt Utilization in an Era of Rising Interest Rates [Startup Financing Pros and Cons vol.01]“.

As part of a new project on “Startup Investment TV” called “Startup Financing Pros and Cons,” I discussed three recent pieces of news regarding debt finance with Mr. Ishibashi from Gazelle Capital.
The three news items covered this time are as follows.

1. Comments from Caddi CEO Kato: “If long-term interest rates rise, we will increase equity financing”

2. Paytner’s 2.7 billion yen procurement via syndicated loan

3. The Financial Services Agency’s policy to deregulate non-banks and debt funds

Why is the proportion of debt so high in Caddi’s large-scale financing?

Let’s first look at the fundraising of Caddi, which has achieved unicorn status.
What I first noticed is that they have made the proportion of debt finance quite large.

Looking at past funding releases, equity was about 4 billion yen while debt was about 5.1 billion yen, meaning debt exceeded equity. Furthermore, they raised 17.7 billion yen in their Series D round earlier this year, and according to a Nikkei article, this year’s borrowing is on a larger scale than last year’s.

As they progress through stages, the uncertainty of the business decreases, and profitability is either in sight or already achieved. That is precisely why they are able to achieve a finance mix that increases the proportion of debt to suppress dilution.

Dilution: This refers to the “dilution” where the shareholding ratio of existing shareholders decreases due to the issuance of new shares. If you raise funds through debt, you do not issue shares, so the shareholding ratio is not diluted.

So, what is the meaning behind Mr. Kato’s comment in the October 2026 Nikkei article to the effect that “if the upward trend in long-term interest rates continues, there is a possibility that our stance will change to raising more equity”?

https://www.nikkei.com/article/DGXZQOUC1712L0X10C26A9000000/

At present, looking at the cost of capital, equity is higher and debt is lower. Since the cost of procuring money is cheaper with debt, the view is that if you can do it with debt, you should do it with debt. However, if that procurement cost rises, the option to raise equity sooner and in larger amounts will emerge.

That is how I interpret Mr. Kato’s statement. Conversely, it also means that at this moment, the situation is still “it’s fine if we can go with debt.”

Even with mega-bank loans, interest rates are in the 6% range; what is the turning point for the reversal of the cost of capital?

Mr. Ishibashi asked at what level the cost of capital for equity and debt would reverse, given that long-term interest rates are breaking through 3%.

The earlier the startup phase, the higher the risk for the lender. Therefore, the spread added to the base interest rate becomes larger.

If the base interest rate plus the spread exceeds 10%, it would certainly feel tough. If long-term interest rates were to exceed 5%, it is quite possible that the total would exceed 10% when the spread is added on top.

In fact, it is no longer rare for startups transitioning from early to middle stages to receive loans from mega-banks with interest rates in the 6% range. At that scale, the amount might still be in the hundreds of millions of yen, but even so, the interest alone would exceed 10 million yen.

While that may still look lower than equity, the cost of equity is hard to see until it is realized, whereas interest is paid out as actual cash. I believe we have reached a stage where this damage must be considered quite seriously.

Low interest rates from government-affiliated financial institutions are “like a subsidy”

Regarding how much an early-stage entrepreneur should be aware of interest rates, I find the existence of public loans, such as those from the Japan Finance Corporation or those with credit guarantees, to be a complex issue.

Startups in their early stages, which should inherently be the highest risk, can borrow under extremely favorable conditions: low interest rates, no collateral, and no joint guarantees.

This is truly wonderful.

Looking at the disclosure reports from the Japan Finance Corporation, the default rate is in the 7% range. They are actively lending to increase the startup rate, taking risks intentionally from the perspective of Japanese government policy.

However, if you get used to those conditions and think, “Is this what a loan is?” you will be taken aback when you reach the early-to-middle stage and are suddenly told the interest rate is 6% or 7%.

Loans with credit guarantees and loans from the Japan Finance Corporation’s micro-business unit have their interest rates kept low due to specific programs.

I think it is best to view this as a state where your out-of-pocket burden is reduced like a subsidy, and prepare for the coming world where interest rates exist.

Even if interest rates rise, the structure where equity leads remains unchanged

If interest rates rise, will equity financing increase?

For so-called “true startups” that aim for rapid growth in a short period by raising funds through equity, I believe the structure where debt does not follow unless equity leads will remain unchanged.

However, there are many ways to climb the mountain.

Some cases start like small businesses using loans, personal funds, and subsidies, and then grow into startups at a certain point. Also, for deep-tech startups that nurture their business over a long period, there should be a different approach.

Mr. Ishibashi also spoke from the perspective of a VC.

If interest rates rise, the level of return expected by those investing in VC funds also rises relatively. Since the average return of Japanese VC funds is not favorable, it becomes harder for VCs to raise funds, and the supply of equity to startups also decreases. Everything is linked.

If equity funding decreases, the flow of funds for true startups will reverse. Even if government funds like SBIR enter deep-tech startups, or more broadly, startups in the 17 strategic fields prioritized by the government, that alone is not enough.

I believe that equity funding is still necessary, and the form where equity leads and debt follows will continue. If equity funding stalls, it will likely become difficult to provide debt as well.

SBIR: A system where the government supports research and development for small and medium-sized enterprises and startups. It is established as a mechanism for ministries to provide funding from the research and development stage to commercialization.

I no longer hear people say, ‘We haven’t used debt by Series A’

Mr. Ishibashi feels that because equity is becoming more difficult to raise, more entrepreneurs are focusing on becoming profitable early to increase their bargaining power, keeping both IPOs and M&As in mind.

I also feel this shift very strongly. For better or worse, I have the impression that fewer entrepreneurs talk about IPOs, and the concept of a ‘dual track’—considering both IPOs and M&As in parallel—is spreading.

Dual track: A strategy of preparing both an IPO and an M&A as exit options in parallel.

For those looking at M&A or those who want to manage their business as a going concern for a long time, there are naturally more opportunities in debt than in equity.

While this means there are big opportunities for us, the debt literacy of these individuals is also steadily improving. Recently, everyone seems to consult with AI first, so their inquiries are generally well-prepared.

In terms of the startup phase, the track record of startup loans from the Japan Finance Corporation and credit guarantee associations is increasing year by year, which is clearly reflected in the statistics. The feeling that it is standard practice to use startup loans is definitely taking root.

I really don’t hear people say, ‘We haven’t used debt until Series A’ anymore.

On the other hand, among financial institutions lending to startups, I get the impression that a clear divide is emerging between those that are actively lending and those that are not lending to startups at all.

I believe mega-banks have the spirit to lend firmly where there is a noble cause and to build industries. They are engaging seriously with deep tech in general, including space, and are also working on startup loans and venture debt within that context.

Regional banks have a mission to foster local startups and revitalize the regional economy by boosting local small and medium-sized enterprises.

Looking solely at profitability, loans to local businesses or LBO loans for business succession are more lucrative than startup loans, so it may be difficult for them to shift their focus to startups now.

However, some regional financial institutions are already active in startup investment, and in those places, movements might become even more active, such as taking on new venture debt initiatives. My assessment is that the polarization of financial institutions may progress.

Paytner’s 2.7 billion yen syndicated loan: Why they are strong in debt

The second topic is the news that Paytner raised 2.7 billion yen through a syndicated loan arranged by Mizuho Bank. Fukuoka Financial Group, Shoko Chukin Bank, and Yamanashi Chuo Bank also participated.

Syndicated loan: A mechanism where multiple financial institutions coordinate to lend to a single company under the same terms. The lead financial institution is called an ‘arranger’.

My honest impression is that Paytner continues to be strong in debt.

I have been talking with the CEO, Mr. Sakai, since the company’s inception, and they were already actively utilizing debt four years ago.

Based on released information alone, the total amount raised is approximately 15.68 billion yen, combining equity and debt. Of that, equity is about 3.63 billion yen and debt is about 9.4 billion yen, meaning debt is about three times the amount of equity (this is an aggregation from press releases, so it may not be exact).

While equity has been raised from over 30 companies, including operating companies, VCs, bank-affiliated firms, and individual investors, it appears that debt has been raised from at least 13 companies.

The background to this lies in the characteristics of Paytner’s business model.

Since Paytner provides factoring services, they pay out money upfront to purchase invoices. It is a business with a strong need for financing, as funds are required upfront to generate revenue. Timee, which provides salary advances, has the same structure and raised hundreds of millions of yen in debt as working capital. Since this is essentially like purchasing inventory, there is a constant need for funding.

Factoring: A service where a company purchases accounts receivable (invoices) held by a business and converts them into cash before the payment due date.

Furthermore, it is already clear that revenue is being generated through factoring, and with TV commercials running, I believe they are growing steadily. From the perspective of financial institutions, they should be able to confirm that the money lent is being repaid as the company grows.

Financial institutions should also be able to properly track that once they lend money, it will be repaid.

Of the 13 companies, I suspect that for at least half or more, this was not their first transaction; rather, they have built up a track record by borrowing once, borrowing more as revenue grew, or refinancing. That is why I believe they have developed such debt capacity.

So, how much do rising interest rates affect a business that borrows funds for what is essentially inventory?

Paytner also recently raised approximately 2.3 billion yen in equity in a Series D round, and I believe they will continue to need equity for growth-oriented spending, such as TV commercials.

On the other hand, regarding the inventory-like portion, the gap between the selling price and the cost of goods will narrow, so things will likely get tougher. There is also a possibility that this will be passed on to factoring fees. Currently, even if they raise funds through venture debt, they are able to increase borrowing because there is a margin between that and the factoring fees. If this margin were to reverse, the situation would change.

Incidentally, in a case where another operator involved in purchasing credit card payment receivables received large-scale loans from numerous financial institutions, I heard that the three megabanks had firmly pulled out.

In that sense, I believe Paytner, with Mizuho Bank acting as an arranger, has undergone thorough due diligence (DD). By the way, in the case of Timee, I recall that Mitsubishi UFJ Bank, where CEO Mr. Ogawa previously worked, led the deal. It is not just Mizuho Bank that is active with startups.

Deregulation of the Non-Bank Corporate Bond Act is good news for fintech

The third topic is the Financial Services Agency’s policy to promote deregulation for non-banks. This is about whether or not to amend the Non-Bank Corporate Bond Act.

When non-banks that are not banks raise funds for lending to businesses by issuing corporate bonds, there were regulations such as the requirement to have a certain amount of capital. This became a barrier to entry, making it difficult for companies like fintech startups to enter the market. Therefore, consideration of deregulation has begun.

Fintech startups like Fivot and Yoii are already conducting lending by securing funds through equity financing, borrowing from financial institutions, and forming debt funds. This deregulation is about lowering the hurdle for using funds raised through corporate bonds for lending.

I think this is good news for fintech startups and companies with models like Paytner’s.

On the other hand, if regulations are relaxed, the risk of those buying the corporate bonds ending up with poor-quality bonds will increase. Therefore, measures such as limiting buyers to qualified institutional investors (professional investors) are being considered. There was a similar discussion regarding equity-based crowdfunding.

I haven’t received such consultations yet, but I hear from accountants who handle fund management that there has been an increase in talk about debt funds recently. I think this is something that could happen in the future. Incidentally, it is said that if a corporate bond meets the requirements for a private placement, such as a small-scale private placement bond, it can be issued with much simpler procedures compared to public bonds issued by large companies on a scale of tens of billions of yen.

Summary

In this session, I considered the changes in startup debt finance based on three pieces of news: rising interest rates, Paytner’s syndicated loan, and the deregulation of non-bank corporate bonds.

• When long-term interest rates rise, even loans from mega-banks for early to mid-stage companies can reach the 6% range, which may lead to a reassessment of the allocation between equity and debt.

• Low-interest loans from government-affiliated financial institutions or those with credit guarantees should be viewed as ‘subsidies,’ and companies should prepare for a world with interest rates.

• For high-growth startups, equity will continue to lead, with debt following.

• Advance payment models like Paytner have built up their debt capacity by accumulating a track record of repaid loans.

• The deregulation of non-bank corporate bonds is good news for fintech, though measures such as limiting buyers to qualified investors may be considered.

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