How do I choose a venture debt lender?

Venture debt can be an effective way for start-up and scale-up businesses to fund growth activities.

These might include:

• Boosting your available capital
• Extending cash runway
• Investing in sales and marketing
• Researching and developing new products

To take full advantage of these and other possible benefits of venture debt, you'll need to find the right lender. Much like raising equity involves finding appropriate investors, your loan agreement should be based on a strong strategic partnership.

In this article, we explore what you can do to identify the venture debt providers that offer the most value for your business.

Who are venture debt lenders?

Venture debt is offered by banks and other financial institutions such as Private Debt funds. It may also be accessible via other channels, such as peer-to-peer (P2P) lending and crowdfunding.

These loans are typically not available as a mainstream product offering from commercial lenders. This is due to their specialist nature and requirements, such as the availability of venture capital as the primary source of repayment (PSOR).

Venture debt is therefore typically only an option for fast-growing businesses that have raised equity from reputable investors.

Given the specific focus of these loans, they're often supplied by banks that specialise in working with fast-growing, innovative businesses.

Lender reputation and track record

When doing your due diligence on venture debt providers, look into their reputations and track records. Ask pointed questions about each lender's past experience and connections in the innovation economy.

For example:

• Have they worked with businesses similar to yours in the past and built lasting relationships?
• Do you feel confident they understand your venture and what you want to achieve?
• Are you satisfied with their answers to your questions about venture debt?
• Have they shown they can be flexible and accommodating to specific needs?
• Can any peers or fellow businesses share their experience of working with the lender?

Be on the lookout for warning signs that lenders are only interested in their own gains. A good example of this is a provider changing the terms of a deal as you prepare to sign the final loan documents.

Non-monetary benefits

When evaluating providers, it's worth considering partnership benefits that go beyond the purely financial.

Frequent and transparent communication, for example, might be a priority for you. This could prove vital when you're facing challenges and need some flexibility from your lender.

Predictability is another big plus. When you're working hard to innovate and grow your business in a dynamic space, there's clear value in strong, steady partnerships.

Ultimately, you should feel good about the lender you're partnered with, as well as the terms of your deal. You'll be working with them closely, so it's important to have a relationship that works well on a human level.

Final takeaway: Find the right balance for your business

It goes without saying that the details of any loan deal matter. But it's worth asking if your business is willing to favour deal terms over other qualities, such as flexibility.

Conversely, focusing too much on relationships and “soft” benefits might mean you miss out on the most favourable terms.

The key to this could be looking for a provider that offers a good balance of benefits.

Careful due diligence is vital, but don't forget how important those everyday relationship factors can be.

Read more about this approach to funding business growth on our venture debt FAQs page.