Banks are able to lend to startups cheaply because their source of funds (customer deposits) are inexpensive because interest rates on checking and savings accounts are almost zero. However, Banks are Federally regulated and must be careful not to lose customer deposits on bad loans. Therefore, they rely on Material Adverse Change Clauses (MAC), Investor Abandonment Clauses and Other Covenants to control their risk and limit their losses.Most banks have moved away from MAC clauses, but almost all bank term sheets include investor abandonment clauses. This term means a bank can force your investors to put more money in the company and if investors don’t act, then it becomes an event of default. Once a company is in default, the bank can sweep the cash to make themselves whole. Banks do this rarely and don’t like doing this, but it is the way they manage risk and losses.In summary, banks leverage their low cost of capital from customer deposits, and the ability to use an investor abandonment clause, to lend cheaply. However, remember banks are not very flexible and need those covenants in the deal.Comparing the Banks vs. Fund Venture Lenders, like a BDC or actually a pure venture capital fund, you’ll see Fund lenders are much more flexible but more expensive. Fund Lenders cost of capital is much higher because they are getting money from big institutions like endowments, foundations, and/or public investors (BDC) so they have to deliver a high return for those investors.Fund Lenders justify the higher cost is by providing a high degree of flexibility. No material adverse change clauses, no investor abandonment clauses, providing larger deal amounts than banks would provide a startup, and longer interest-only periods.So, Kruze Consulting views Funds and BDCs as flexible, very aggressive, but expensive. Banks are very conservative, like to tie you up a little bit, but are very cheap.Startup Founders have to decide what type of lender and what type of risk profile they can live with. Founders spend many years of their life building their companies. Lenders can alter the mix between the VC Investors and Founders, At Kruze Consulting, we have many clients that borrow from banks because of the Founders and Board like the cheap cost of capital. At the same time, many startup clients will borrow from fund lenders because they’re willing to pay for that extra flexibility, extra dollar amounts, and extra interest-only periods.Kruze has done the work for you by compiling summary scouting reports on the premier startup banks: Square 1 Bank, Comerica, City National Bank, and Bridge Bank.Kruze has also developed scouting reports on these funds: Western Technology Investments (WTI) and TriplePoint.