Venture debt is a type of debt that is suitable for fast-growing startups that venture capital funds have previously backed. In most cases, the venture debt is provided by banks, institutional investors, or dedicated venture-debt funds along with equity financing. Unlike standard debt financing, venture debt investors are also interested in the long-term growth prospects of the organization. Moreover, it is usually granted at an interest rate higher than the interest rates on bank loans and bonds.
There are many advantages to venture debt and to know about the details, one should go through the discussion below:
Prevents the dilution of an organization
The first and most obvious benefit of using venture debt is that it helps entrepreneurs to avoid the dilution of their firm. The investor may be confident about the ability of their firm to generate revenues and repay the debt over an extended period. If the banks are unwilling to lend to such a firm, they generally have no option but to raise a round of equity funding. In such scenarios of venture debt, this is not the case. The founders can take on some debt for a short period. Later, they can pay off the debt and still completely control the organization.
It helps to avoid the down rounds
The funding rounds for the Start-up company can be significantly influenced by bargaining power. If prospective investors are aware that the company is running out of cash, they will tend to lower the organization’s valuation drastically. This is because they are aware of the fact that the founders do not have many options. Venture debt also proves to be a viable alternative in this case. Venture debt allows a startup organization to raise money between investment rounds. This ensures that entrepreneurs are never desperate to borrow funds from the market. They can survive on their own for some time and are, therefore, in a position to find investors willing to offer them a reasonable valuation. Venture debt also helps the investors avoid down rounds, which can be detrimental to the organization’s future.
Quick and Convenient
Venture debt is also relatively quick and convenient. The paperwork required to obtain venture debt is much less than a traditional bank loan. Moreover, the terms are much less restrictive. This is why entrepreneurs prefer to raise venture debt whenever they need quick cash.
Venture debt is a form of “capital-in-residence” for a particular time frame with the expectation that the company will grow its business and will also generate revenue to repay the loan. In most cases, venture debt is provided for three to five years. Venture debt is also widely used by the entrepreneurial community. Companies during a rapid growth stage benefit significantly from taking on venture debt. In thirty years, this venture debt has emerged as one of the most critical components of a balanced capital structure. Moreover, venture debt doesn’t require board governance or a financial stake in the borrowing company. Financing is often used between the rounds of equity, thus providing quick infusions of capital that do not require drawing from the equity reserves of the current investors.