Questions to ask when considering venture debt as a funding option
Debt funding can be a crucial form of growth financing for start-ups and scale-ups, many founders do not consider it as an option when raising capital. Yet with the right product – and often when combined with equity investment – debt funding can help supercharge a promising company’s growth opportunities, taking them from startup to a market leader.
Venture debt is becoming an increasingly popular option for high-growth companies. In 2022, it made up about 30% venture capital raised by tech companies in Europe, according to data from Dealroom.
Here are five key questions founders should be asking when considering venture debt as a funding option.
What are the main benefits of venture debt?
For fast-growing companies, venture debt can offer a more cost effective form of funding than other types of financing such as equity investment. It is often available more quickly than equity funding and does not require founders to spend months on the road talking to potential investors. Instead, they can do what they do best – build their business. Venture debt is growth capital that can help companies achieve their ambitions.
Is this like taking out a regular business loan?
Venture debt is designed for high growth companies that cannot offer the sort of security traditional lenders look for when approving loans. Instead, venture debt providers look at factors such as equity investment from venture capital firms, IP and growth in annual recurring revenue. The terms do vary enormously across the range of providers and it is always wise to choose a lender with clear financial stability and a proven track record.
Is it a choice between debt and equity?
Many fast-growing companies choose to blend both debt and equity when putting together a funding round – it’s a more cost effective way to finance the growth of your business. Doing so can allow founders to raise the amount they need while reducing the dilution of their business. It can also be used to extend a company’s runway which allows founders to raise funds at a higher valuation down the road. A good debt provider will act as a partner, offering experience and flexibility to founders as they continue to build their companies.
Will there be hidden charges?
Nothing is hidden. As with any financial product, it is essential to read the small print. An attractive upfront price and offer of a large sum can be alluring, but always be sure to fully understand the repayment terms – and any clauses if there is a failure to repay. There is significant variation in the products, so be sure to evaluate what is right for the business and consult with experts if necessary.
How quickly are the funds needed?
When there is a specific, growth-related use for the funds, debt can be a good option for founders to consider. For example, financing an M&A deal, launching into a new market or vertical, or generating new customers. The advantage is that applications are often approved relatively quickly, meaning growth plans can be executed without significant disruption. This is particularly true with M&A, when failure to provide the funds on time will result in the deal falling through.