Venture debt is a type of short-term financing typically raised alongside equity funding to extend a company’s cash runway or as a bridge to provide needed capital between equity rounds.
Unlike conventional bank financing, venture debt lenders are less concerned with financial covenants and more interested in the business’s ability to meet milestones. Moreover, they’re far more flexible and customizable to your business’s unique needs.
The Definition of Venture Debt
If you are wondering what venture debt definition is, it is a form of financing for companies that have raised money from venture capital investors. It is different from traditional bank lending, where banks generally only loan to cash flow-positive, asset-backed companies.
Debt is typically less restrictive than equity financing, giving startups greater flexibility and the ability to adapt to their growth challenges. It also allows entrepreneurs to work through unforeseen circumstances and restructure their debt without being subjected to regulatory restrictions.
A venture debt lender will generally conduct due diligence on a company for 3-6 weeks before agreeing to fund. This includes digging into financials, business plans, and management team interviews to get a sense of how well the company has done in the market so far, and what challenges it may face.
Lenders in the venture debt space are willing to take on high default risk, and will often receive warrants on the company’s common equity as part of their compensation for this additional risk. These warrants typically represent 5% to 20% of the principal amount of the loan, and will convert into shares at a predetermined price based on the company’s stock market value at the time of the last equity raise, or at a discount to a future equity raise.
Definition of Term Loan
Term loans are financing options that provide borrowers with a lump sum of cash upfront in exchange for specific borrowing terms. These are often used to fund a business’s growth and expansion.
They offer flexible repayment plans and lower interest rates than credit cards, but you must be careful with your financial situation when deciding to use this funding option.
A term loan should be used only for projects or purchases that will add value to your business and generate a return on investment. For example, purchasing a new facility or marketing your product can add to your revenue stream and help your company grow.
Getting a term loan involves submitting detailed financial records and proof of your business’s ability to pay off the loan in full over a period of time. The lender will also analyze your business’s financial history and projections to ensure that you can afford the loan payments.
Definition of Revolver
Revolver debt is a type of credit that can be accessed by individuals and corporations. It is useful for companies that have uneven cash flow and that may need to access emergency funds to cover unforeseen expenses.
Unlike other installment loans, revolver debt does not have a fixed payment value or term. This means that the borrower can access the money as much as they need whenever they want.
However, the interest rate will be higher than in an installment loan. This can make it more difficult for borrowers to budget and manage their finances.
The terms of a revolver can vary significantly, depending on the manufacturer. Most revolvers feature a single-action trigger, which requires the user to cock the hammer by hand and then fire each round. This action reduces the length of the trigger pull and makes it easier to shoot accurately.
Definition of Warrant
Warrants are a type of security that gives a lender the right to purchase equity in a company at a specified price. They are typically part of venture debt deals and offer downside protection and upside potential for the lender.
The amount of warrants a borrower receives varies by loan amount, but generally, they are equivalent to 1-2% of the company. These are very low-dilution terms and represent a significant financial incentive to the lender, as they often have the option to buy these shares later if they decide they need them.
The lender may also request warrant coverage, which means that a percentage of the face value of their loan can be converted into equity at the per-share price of a company’s last financing round. This is a relatively straightforward way for the lender to get a piece of equity in the company if the company does well, and it is becoming increasingly common for lenders to include this term in their term sheets.