Debt financing is used by large companies that need capital expenditures yet have a good track record for projected growth. Companies raise venture debt in order to reserve additional capital for next rounds and to invest across their portfolios. It can prevent dilution from new investors by reducing the size of a new equity round, or assist with reaching milestones to raise a more valuable round at a higher valuation. For growing companies, there are a few different types of venture debt funding approaches available, depending on their funding goals. Let’s take a look at three types of venture debt financing.
3 Types of Venture Debt Include:
Growth Capital Term Loan
The type of venture debt most similar to bank loans is the growth capital term loan. For bank loans, assets, such as equipment and property, are generally required to qualify. Venture debt, on the other hand, looks at the company’s existing equity and expected future growth to be able to pay off the debt.
Growth capital term loans are fixed-term loans that often have a two-to-three-year repayment period and include principal and interest. The funds may be released all at once, or in installments, giving you some cash upfront and the rest later to manage interest expense and debt load as the company grows.
Business Line of Credit
A revolving credit line is another way to finance venture debt. It is much like a corporate credit card, but larger. With lines of credit, you borrow money at a certain limit. You can borrow the entire limit, or just a portion of it.
During the early growth phase, this flexibility is crucial to financing such costs as hires, overhead, and daily expenses. By giving the company more time, the company can execute meaningful changes in strategy and operations.
Convertible loans are another option for companies. This is a type of short-term debt financing. With a convertible loan the loan amount will be converted into equity at a specified date instead of the full amount being repaid. If you do not raise capital before the maturity date, the convertible debt has to be repaid. Investors can be compensated with additional provisions such as caps and discounts in convertible notes to offset the additional cost of investing in earlier rounds of startup financing.
Eastward Capital Partners offers venture debt options for companies close to achieving financial and operating metrics including product introductions or enhancements, profitability or other financial metrics. As we’ve shown, there are different types of venture debt to choose from. You can access capital in different ways and repay it in different ways. Companies approaching profitability can benefit from venture debt as it can often eliminate the need for additional financing rounds.
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