Venture debt is a form of speciality debt financing. It is available for companies not serviced by traditional lenders such as banks. The funding has a design as a combination of limited equity and loan. Companies that do not possess any hard assets or warranties used to get working capital loans can use this form of financing. This form of funding helps the entrepreneurs get the required capital to start the business. Venture financing is available in many forms based on the entrepreneur’s needs. Some of the most common options include:
- Term loan. The term loan is a lump sum of borrowed, and the settlement should be done over a set duration and has been used in expanding the business or refinancing existing debts.
- Line of credit. A line of credit is ideal for businesses that desire to access capital quickly or have variable expenses.
- Convertible debt. A convertible loan is a type of loan that the firm can later change into equity shares of the business.
Some of the advantages of venture debt include:
- It helps companies face unexpected market instability. Venture financing was of great help after the economic impact from covid -19 pandemic. It helped many businesses to accelerate their growth.
- Supports the founders and the venture capital-backed startups reduces shareholder dilution as it is generally at the early stages of business growth.
- Increases capital. Venture financing enables the company to convert a small sum of money to increase its means. The debt repayments are generally tax-deductible.
- Easier to obtain. For the company to acquire venture financing, it needs to have a stable income stream. Substantial assets can also be used as security.
- Venture financing is flexible. The loan amounts, covenants and personal guarantees are more accessible to negotiate than the banks.
- Quick process. The procedure of acquiring the loan takes a short duration. It can be completed within a span of 30 days as compared to the 3-5 months for the equity.
- Venture financing does not require any sponsorship. It is not necessary to have venture capital backers when obtaining the loan.
- Increase money runway. Venture financing acts as a bridge between equity financing and higher valuation. This helps the firm to achieve the key milestones. This allows the firm to avoid raising any additional equity.
- Increase profitability. Profits are increased as there is growth capital hence getting rid of equity dilution.
- Prepares the business for funding rounds. In case a startup is not funded enough, venture financing is an ideal source of capital. It becomes possible to increase growth by working with an experienced investor. This, in turn, results in improved operations. This form of alterations makes the firm more enticing to venture capitalists. A valuation of the upcoming series of round equity is also increased.
- An alternative source of equity funding. Private equity can be an excellent option for a firm that needs growth capital. The business can adopt the use of venture financing if it does not qualify for venture capital.
In conclusion, there are many advantages of venture financing. The above article outlines some of the benefits a business can experience.