Broadly speaking, there are two categories of venture and growth providers: banks and funds. It is important for founders and investors looking at this option to understand the differences in their structure, approach, and how they operate.

Banks vs funds?

Banks that offer venture and growth financing rely on their balance sheet and deposits to fund loans. Their capital is regulated, and they are subject to leverage and liquidity requirements. Their primary goal is to generate interest income and maintain a long-term banking relationship with a company by offering other services such as cash management and treasury.

Funds, on the other hand, are specialised private credit investment vehicles with a Limited Partner (LP) structure. A fund is a pooled investment vehicle with a manager, or General Partner (GP), who raises capital from institutional investors. The goal is to generate a high internal rate of return for their LPs.

Differences in lending criteria

When seeking venture and growth funding, it is important to understand your provider’s lending philosophy. Typically, banks are slightly more conservative in their lending than funds. In terms of lending criteria, banks are likely to have financial covenants included in loan agreements. These may include minimum cash balances, revenue targets, or debt-to-equity ratios.

As private credit vehicles, funds typically have a higher risk tolerance for lending. Their criteria are more focused on a company’s growth trajectory and future potential as opposed to historical financials or tangible assets – although bank lenders will often take all these factors into account too.

Deal term differentiators

The most common trade-off is whether to go for a bank deal and accept some form of financial covenant or to go with a zero covenant deal with a fund but accept higher pricing and probable warrant coverage.

How can I determine what is best for my business?

Although venture debt is appealing for companies looking to scale, it’s important to consider all aspects, including the costs associated. For instance, there are typically higher interest rates than traditional bank loans. Lenders often seek warrants and upfront fees when arranging the loan, and the repayment terms can be a strain on cash flow, particularly for businesses that aren’t yet profitable.

Your relationship with the lender is another critical factor. Finding a provider who understands your business and the unique challenges of a high-growth company is crucial. Banks might be a better fit for those seeking a long-term partner and a more conservative, lower-cost loan. However, funds might be better suited for those -who can manage a higher price point in exchange for increased flexibility.

The good news for European high growth companies is that now there are an expanded set of providers compared to a few years ago.  So, take the time to reach out to a few providers and get the right deal that is tailored for your business.

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