What economic factors impact venture debt financing?

Venture debt financing could be a useful option for your business if you meet certain criteria.

Existing venture capital support from reputable investors is one prerequisite. Venture debt is also generally only available to high-growth businesses planning to raise more equity in the near future.

Meeting those criteria means taking an inward look at your business, and making sure you understand:

• How venture debt relates to equity
• Whether it's an option for your business right now
• The key indicators and metrics debt providers look for

As important as these internal questions are, lending is also influenced by wider economic forces.

Knowing the external factors that commonly impact debt financing may help you manage risk and make the right decisions for your business.

The impact of interest rates

Put simply, interest rates are the cost of borrowing money.

When interest rates are high, debt becomes more expensive. This has a knock-on effect for both lenders and for businesses looking to borrow.

When weighing up loans and other financing options, you'll want to know how interest rates will impact your repayments. There are clear implications for cash flow - a common risk factor to consider when taking on venture debt.

Debt providers could also be more wary in a high interest rate environment. They will want reassurance that you can access the funds needed for repayments.

This taps into a key difference between venture debt and other business loans: the primary source of repayment (PSOR). Venture debt providers usually rely on venture capital funding as the PSOR.

When interest rates are high, there could be more scrutiny on equity rounds and how much investment you're able to raise.

The influence of inflation

High inflation is another macroeconomic factor that affects many areas of a business. For example:

• How much you spend on goods and raw materials
• Your customers' spending power
• Employee wage expectations

Like interest rates, high inflation could make venture debt providers more cautious and less willing to lend money.

In this type of environment, lenders might take a closer look at your business model, performance and the overall health of your company to determine your exposure to the potential effects of high inflation.

That means, if you're seeking venture debt, you might need to prepare for tighter scrutiny on financial indicators such as burn rate. Lenders may also ask about your runway - the number of months left until you run out of capital.

Economic growth is good news

On the other end of the spectrum, periods of economic growth can help to create a brighter picture for lending. Venture debt providers could have more faith in your ability to meet your growth targets, raise future equity and make repayments.

When the economy is performing well, you might also enjoy:

• More consumer and commercial spending power
• Higher demand for goods and services
• Increased investor confidence

These are key points for the sorts of businesses that use venture debt: high-growth start-ups and scale-ups.

Venture debt providers will consider a company's potential exposure to economic influences in their loan decisions and may be more prepared to lend when the economy is doing well.

Final takeaway: Tracking economic trends is never a bad thing

Macroeconomic forces might be outside your control, but your business will certainly feel their effects.

Keeping up with these factors, like interest and inflation rates, will help you make informed decisions about the things you can control, like when to seek venture debt, how to answer lenders' questions and getting help to understand providers' responses.

For answers to other common queries about this subject, read our venture debt FAQs.