Venture Finance Loans
What is it?
Venture debt or venture lending is a specialist type of debt financing usually provided to venture capital backed businesses.
This type of lending is specialist in nature because unlike traditional bank lending, this type of finance is available to fast growth businesses which may still be loss making and not yet be generating positive cashflow.
How does it work
Lenders will look to diligence the forward-looking business plan and financial projections and will normally only fund alongside venture capital firms.
Loans will range from 3 to 5 years and structures may include assignments of book debts. Venture lending should be covenant light, with the potential to be covenant free.
Pricing will vary dependent on the stage of the business and the debt / equity mix of the transaction. Lenders will usually provide up to 30% of the total financing round with the remainder funded as equity from the management team or venture capital firm.
Costs include an up -front lending fee – ranging from 1% to 3% with an interest margin of between 5% and 10% above LIBOR or prevailing rate. An early repayment fees is also likely. Venture debt providers will also combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default typically giving them rights to a 0.5/1% stake.
Venture lending is a specialist form of financing that is designed to minimise the amount of equity business owners need to give to investors to fund their business. It is very different from other forms of lending and should be viewed as such. “Due Diligence”, for example legal and financial diligence are significant parts of the process and the costs are in the thousands. The borrower should ensure that scope of due diligence and costs are agreed in advance – ideally any diligence undertaken for a lender would be incorporated within the diligence of the VC investor so no additional costs are incurred. This can also mean agreeing appropriate firms for the work.
The main advantage of this funding is that it minimises equity dilution for founders which means they keep the control of the business whilst obtaining the cash required to grow, therefore for the right businesses this is a very intelligent financing structure.
Venture finance is complex and should only be sought with appropriate professional advice with a competent firm who, like Funding Friends Ltd, have strong experience in the area.
If you’d like to talk to us about venture finance, contact us here.