Lending

Venture Debt

Venture debt – sometimes referred to as ‘growth lending’¹ - is a flexible term loan designed to help start-ups and scale-ups (typically Series A, B, and C), who are fast-growing but pre-profit. Venture debt is often used to provide runway extension to the next round of fund raising or to help reach strategic milestones.

Like any other loan, venture debt needs to be repaid over a defined period of time. The debt is often obtained at the same time or shortly after an equity round (or multiple equity rounds) and can be used in a variety of ways – discussed and agreed in advance with the lender. Venture Debt is a typically lower cost means of financing performance growth², investing in research and development, purchasing capital equipment and inventory, providing a ‘cushion’ for unforeseen funding needs and operational requirements or customer acquisition costs through sales and marketing expenses.

Who is Venture Debt appropriate for?

Venture debt is typically available to venture capital-backed businesses - whether early-stage companies or more mature companies that are actively choosing to focus on high growth over profit. That means it’s not an option for bootstrapped businesses, who could consider traditional debt options such as cashflow-based term loans or asset-based lines of credit if they have positive cash flow.

Key features:

Security
Typically structured with security taken over all assets.
Term aligned to growth trajectory
Typically 36 – 48 months but can be up to 60 months.
Warrant
Lender receives the right, but not the obligation, to purchase equity at a future date to share in the potential upside if the company excels.
Interest-only payment period
Typically facilities are structured with an introductory period where only interest is repaid, and capital repayments are made only when the ‘amortisation’ period kicks in at which point both capital and interest repayments are made. Typically, the interest-only payment period would range from 6 to 18 months followed by the amortisation period which runs until the end of the term.

Benefits:

Flexible
Typically no financial covenants.
Complementary
While venture debt should not be used to replace venture capital investment, when used alongside equity financing, venture debt can allow you to raise capital while reduce dilution for founders or shareholders.
Cost efficient
These facilities are typically a less dilutive form of capital when compared to an equity raise. Whilst there will typically be a requirement for the borrower to provide the lender with a Warrant as part of the transaction, this will likely mean the borrower is giving away a smaller portion of ownership than if they raised the same amount of capital through an equity raise. This can be a more capital efficient way of funding operations, cash runway or working capital.