Q: What is Venture Debt?
A: Venture debt is a complement to venture capital where venture capital backed companies can secure a growth capital loan and borrow money even though they would not otherwise be creditworthy from a traditional banking perspective. Start-up companies use debt to leverage the venture capital equity they have raised, thereby extending the time needed until their next round of financing.
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Q: When should I consider venture debt?
A: It is best to consider putting a credit facility in place when the company still has cash; therefore, shortly after closing a round of equity financing. It is important to look at your company’s capital needs as a whole, considering how much capital is required immediately as well as over time, and considering how much equity versus debt thereby meeting your company’s needs while maintaining minimal dilution.
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Q: Why should I avoid financial covenants in my credit facility?
A: Typically a credit facility provided by a bank is layered with covenants. Covenants can impact the operations of the company because management must operate the business to remain in compliance with them.
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Q: How are loans secured?
A: Growth capital loans are generally secured by a lien on all assets of the company (blanket liens). Specific asset liens are common for capital equipment financing lines. All-asset liens typically include liens on a company’s intellectual property.
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Q: Why is a partner’s ability to provide both debt and equity important?
A: It is important to partner with a firm that can grow with your company. One that can provide venture debt currently and then in the future can also participate in your next round of financing. A partner that doesn’t look at the financing as a fixed term relationship but instead looks at it as a financing that is a long-term relationship focused on building a successful business.
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