Top Menu

Fueling your start-up dreams with Venture Debt Financing


All growing companies need a little help with funding. Capital to a business is like nutrition to a child. Without the right funds, it is impossible to see a company grow and prosper. Many companies find it difficult to expand after a point due to restrictions in the forms of capitals. Several forms of cash or capital supplements are necessary for the healthy growth of these firms. The first few months of any new enterprise consists of a lot of investment and expenses to fine tune the business processes.

Which start-ups and enterprises should opt for venture debt financing?

These supplemental forms of funding are now becoming very commonplace for almost all kinds of businesses including home-based start-ups to large-scale productions. Venture debt funding is great for all kinds of venture equity-backed companies that do not have traditional debt financing options. It is ideal for all start-ups with high visibility into the forecasts of revenue. Companies with any form of subscription-based revenue models, including PaaS and SaaS providers, are particularly attractive to almost all venture debt financers. To find out if your company is eligible for an alternative debt financing model, check out National Debt Relief sites.

For those who want to know the basics of venture debt financing, it will be easier for them to understand the model by thinking of it as a three-year term loan that offers parts of company stock to the creditors in return of the cash. Simplifying venture debt makes it a "risk capital" that can become cheaper and more secure than equity when the borrower structures it properly.

·         As a result, venture debt is never appropriate as a last resort for financing start-ups or SMEs.
·         It is not suitable for companies with a low cash balance.

·         Companies with a highly varying revenue system should not opt for venture debt financing either.
·         Start-ups without immediate foresight of their market opportunities or creditworthiness should not opt for this financing method.

How much capital can start-ups raise using venture debt financing?

Raising too little capital using this method does not cover the expense of the risks and raising too much exacerbates the cost of the risks. The latter can over-leverage the company. Start-ups need to verify the amounts of debt with their immediate business plan or their current debt startups. As a rule of thumb, companies raise about 30% of their last equity as Venture Debt Financing. Most importantly, for any start-up, the value of debt should be lesser than 10% of the company enterprise value.

What are the advantages of debt financing?

Many entrepreneurs have a lot of fear when it comes to venture debt financing. However, it can be a less costly avenue for accelerated growth and easy funding option for their companies.

·         It can boost the extra cash in need of urgent expansion or investment.
·         Venture debt can also extend the runway and enhance liquidity.
·         It can support the growth of the start-up with low-cost capital. 
·         It also helps to achieve balanced and optimized capital model.
·         It can enhance equity returns of a company or remodel their equity financing options.

When should a start-up opt for venture debt financing?

There are several stages of equity financing. An entrepreneur should try to raise financing immediately after an equity round after the business gains momentum. An increasing number of start-ups are now raising their funds as a part of their equity round. This allows them to keep their equity to the original owners and the business retains more flexibility. Venture debt can be a bad idea when –

·         The revenue model is highly variable
·         The company does not have enough cash (6 months)
·         There is not much momentum in business
·         There is no clear purpose of the loan amount
·         The debt financing is to account for over 25% of the total business expenses

The repayment period for any venture debt financing is about three years. Therefore, if you opt for such a financing option, you will have one to three years to repay the lending party. Since any of the 5 points above can hinder the payment process, the lending companies see these as high risks of non-payment. 

What kinds of venture debts can you try?

There are several kinds of venture debt options people can opt for. The flexibility, cost, and viability can vary between several companies and situations.

The line of credit: This kind of venture debt comes with the lowest cost of a loan. It is easily available to all revenue stage companies that do not want to get into the hassle of fees, flexi interest or high cost of APRs. This includes both equipment financing and accounts receivable financing.

Growth capital term loan: These come with higher flexibility and repayment terms. This one is easily available to all Series A start-ups and the mid to late-stage bootstrapped companies. These are term loans that act as working capital and milestone financing.

While looking for a venture debt capital, always remember that higher flexibility comes with a higher cost and lower flexibility brings the lower cost of loans. The lender will focus on your credit score, current business profile, recent entrepreneurship milestones, the capacity of repayment and collateral for checking your debt-worthiness.

Wrapping things up

There are five terms you should always look into – availability, economics, governance, lender characters, and structure. Consider the cost of the loan, the warrants, fees, the size and term, amortization terms, financial covenants and liquidity covenants too, double check the reputation of the lender and work out a favorable payment structure with your lending company and your finance manager before commitment.

Once you have a clear understanding of the terms and you have a few companies on your shortlist, work on comparing the terms these lenders are offering to your start-up right now. You should always pick the best offers as per market trend. Compromising on the best terms due to lack of enough credit score is not an option. If possible, wait for a few days till your credit score recuperates and approach venture debt financers again.

Daniel Mattei is a Professional writer. He has written many articles on Business. In this article he has mentioned about market trend.
Copyright © WWC Associates. Designed by OddThemes & VineThemes