What’s the Best Time to Use Venture Debt?

Apr 07

What’s the Best Time to Use Venture Debt?

As high-growth businesses scale and aim to meet new milestones, financing and planning that growth becomes increasingly important. Venture debt is one option for companies to get that next milestone. But what’s the best time to use venture debt?

It makes sense to consider venture debt when your company is undergoing a period of rapid growth. Normally, companies will have about 9-12 months of cash runway available between rounds of funding. It’s common for venture debt to be offered alongside a round of equity or within a few months of a round closing. In some cases, with venture debt you may even be able to avoid a subsequent equity round altogether.

Venture debt, unlike venture capital, provides a company with cash without any of the control mechanisms associated with venture capital. The company isn’t subject to dilution and no valuation is required. Even when considering the loan interest, venture debt is considered a less expensive alternative to raise capital compared to equity. By reducing the average cost of capital required to finance operations, companies can leverage their equity raised by using debt rather than equity.


In addition to accelerating growth, many companies consider using venture debt when they need to:


  • Extend runway
  • Reduce dilution for future rounds
  • Expansion plans or acquisitions


When to Consider Venture Debt


Venture debt is more accessible and therefore advantageous for growth stage companies.
When you know you have regular predictable revenue coming in, and a definitive path to profitability, that’s a good time to consider venture debt.

For companies looking to minimize dilution, venture debt has become one of the more popular alternatives to bank debt. Banks are traditionally cautious about lending to high risk companies or startups. The loan process for banks can be labor intensive and approval can sometimes take weeks or longer. Venture debt financing, on the other hand, takes much less time to process.


The Next Step


Venture debt providers look for evidence that companies have the cash resources to repay their debt or that their business is in a strong position to attract an equity round in the future. Company founders need to be ready to show their pitch deck, have historical financial data, and specific plans for future growth. A good pitch should also include data that shows good revenue momentum, and details on how the company is going to make money.

Using venture debt is an option for growth stage companies to purchase new equipment, hire staff, or cover unforeseen costs. And it can help continue to successfully grow the business with very little dilution.


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