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Is venture debt funding right for your business?
Answering these questions can help you decide if venture debt is a feasible business financing option for you.
There's a lot start-ups and scale-ups can do with venture debt funding, from covering growth costs to ensuring you can reach your next equity round.
However, although your business might be ready for the next stage of growth, it might not be ready for taking on venture debt.
If you're unsure about whether it's the right option for you, answering these questions should give you a clearer idea.
However, although your business might be ready for the next stage of growth, it might not be ready for taking on venture debt.
If you're unsure about whether it's the right option for you, answering these questions should give you a clearer idea.
Are you venture-backed?
There are clear differences between venture debt and equity financing, but the two are also closely linked and complementary.For starters, to qualify for venture debt, you must be a venture-backed business. That means you've recently raised funds from investors.
This is a big part of what venture debt providers look for when analysing eligibility. It's a way for them to reduce their own risk and to check your growth credentials.
Venture debt won't be an option if you've chosen to bootstrap your business and you haven't sought venture capital. However, there are other business financing options available to scale-ups in this instance. If you have positive cash flow, you could consider asset-based lines of credit and cash flow- based term loans.
Do you have strong growth forecasts?
Venture debt could be an option for high-growth companies that may, at the time of application, be pre-profit and cash flow-negative.One of the reasons why providers only lend to venture-backed companies is because this backing is taken as a sign of the company’s potential for future growth and potential to raise future equity.
If you're looking at venture debt as a possibility for business financing, first consider what you can show a potential lender in terms of forecasted performance.
Debt providers could also have questions about your plans to raise future equity financing, as this will help you fund growth and repay the debt.
Can you show positive unit economics?
The viability of your product or service is another likely focus for venture debt lenders. This comes down to unit economics - the amount your company makes every time you sell something - which is a vital measure of revenues and costs on a per-unit basis.It's an important metric because it shows, on the most basic level, that your business model works.
Lenders are likely to view good unit economics as a signal that the fundamentals of your business are strong. This will help them assess your potential for growth and your readiness to take on debt. It could be extra important at times when external factors are affecting the lending environment and providers are more risk averse.
Are you a Seed-stage company?
Venture debt isn't generally recommended as a source of business financing for Seed-stage enterprises. It's designed as a tool to enable growth for Series A, B and C scale-ups that have already raised equity.Similarly, if you've secured backing from an angel investor, taking on venture debt may not be the best course of action. It could impact your chances of raising equity capital in the future, because venture backers will be looking to invest in growth, not repayments of old debt.
Final takeaway: If you're equity-backed and ready to grow, venture debt can help
The key point to bear in mind when considering venture debt funding is the need for existing venture backing. If you haven't secured equity financing in the past, you may want to consider alternative sources of funding that better suit the stage of your business.
You could also consider waiting until after your first equity round to look into venture debt funding.
If you are venture-backed, make sure you can demonstrate the strong fundamentals and growth potential lenders are looking for.
