Your company reaches the point where you are generating revenue, but you discover you still need more capital to keep things running. Raising capital allows businesses to continue to grow, and manage day-to-day operations. Raising capital through debt seems like a contradiction, but venture debt financing makes sense for fast growing companies. It can provide a supplementary source of non-dilutive capital or an insurance policy against running out of cash runway to the next milestone.
Companies close to achieving financial and operating metrics including product introductions or enhancements, profitability or other financial metrics are the perfect candidates for venture debt.
The venture debt process usually looks something like this:
1. Find the Right Venture Debt Partner
Your first step is to find the right venture debt financing partner. They should have the ability to develop flexible financing solutions, and have a large portfolio of successful partners. The venture debt partner should also have extensive experience to understand the unique challenges of your business. And they should be able to find the best funding solutions to meet your company’s needs without unwieldy covenants or restrictions. Venture capital investors are often a great referral source for finding the right venture debt partner for your business.
The reputation of the partner is as important as any other factor. Having weathered company specific challenges and multiple negative economic cycles, the Eastward Capital Partners team has repeatedly demonstrated our commitment to our companies.
2. The Screening Process for Raising Capital Through Debt
Once you’ve found the right venture debt partner, the next step is to schedule a meeting. You should be ready to show your company’s pitch deck, have your historical financial data, and specific plans for future growth. A good pitch should include data that shows good revenue momentum, and details on how you’re going to make money.
For instance, Eastward’s loan review process focuses on the value which has been created by the company as well as understanding its future growth curve. As part of Eastward’s initial due diligence process, the team reviews information including investor presentations, financial statements, and the company’s equity structure.
3. Reviewing the Term Sheet
A term sheet in a venture debt deal outlines the actual terms upon which the venture debt provider is willing to make the investment. It lays out the basis for ensuring that all main aspects of a business transaction will be agreed upon by the parties. Term sheet information includes the assets, initial purchase price, contingent factors that may affect the price, and other relevant information.
4. Getting Approval
After reviewing all of the information provided to them, the venture debt partner will submit the file to the credit team. A loan agreement will be signed only after all due diligence is completed.
5. Transfer of Funds
Upon their approval, the lender will wire the funds to you. Of course, like all debt, venture debt has to be repaid. It is not uncommon for venture debt partners to require monthly reports such as income statements, compliance certificates, and annual tax returns.
To achieve funding goals, venture debt is an effective, flexible, efficient, and non-dilutive solution. Starting out on a solid foundation will enable companies to accelerate growth, and receive future equity financing. Businesses can also use it to fund acquisitions, achieve profitability, and launch new products.
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This is not an offer to sell, or a solicitation of an offer to purchase an interest(s) in any fund managed by Eastward Capital Partners, LLC (“Eastward”). Such an offer will be made only by an Offering Memorandum, a copy of which is available to qualifying potential investors upon request. This material is not financial advice or an offer to sell any product. Eastward is a registered investment adviser. Registration does not imply a certain level of skill or training. More information about Eastward including its advisory services and fee schedule can be found in Form ADV Part 2 which is available upon request.
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