Difference Between Venture Debt And Traditional Business Financing

If you know the important facts and information, features and objective of VC loans you will be able to understand and even differentiate between Venture Debt and other traditional business financings which to a layman looks all the same apparently.

There is a multitude of business startup costs that the founders are always worried about. They are often in the lookout for ways to finance their ventures because it is a common and most significant challenge for any startup or small business. This is because all traditional financing sources require a strong credit which these companies are yet to achieve. In such a situation, these startup companies are left with no other feasible alternatives but to turn towards the equity investors instead.

However, the fact that these companies are often not willing to or are not in a position to give up more of their business ownership makes venture debt financing a more crucial instrument.

About the features

Ideally, venture debt financing is a specific type of loan offered to small businesses and startups. This debt is taken on by these companies just to prevent the equity investors taking up a major portion of their business equity. However, venture capital loans are significantly different from all other traditional small business loans in many ways.

Venture debt financing is also known as venture capital loans and it is essentially a type of debt-based financing.

Often all venture-backed companies seek these specific loans between the equity rounds and even to finance certain opportunities.

This capital is not issued by any VC firm but is rather provided by different venture capital lenders such as the banks, private equity firms, hedge funds, Business Development Companies, and a few other specific outlets.

These are issued in a form of debt and not as any equity. Therefore, the founders do not need to give up any sizable percentage of their company ownership to anyone else.

Venture capital loans are specifically structured and are typically much similar to other traditional business loans for medium-term having a repayment period ranging from three to five years.

Occasionally, these loans can also be issued as equipment financing or any other forms of business lines of credit as well.

However, venture capital loans are a much less common process followed by the business owners to increase venture debt than to rear the venture capital.

Good option for startup businesses

There are also several reasons why these venture capital loans are considered to be very good and perhaps the most feasible option for any startup business. These businesses do not have to take on any traditional loans in high interest from other alternative sources and therefore do not need to focus on debt management, debt consolidation and debt consolidation compare for that matter.

Different business owners find it very surprising when they hear that mixing debt and equity can prove to be very productive for their business and be the best possible option for funding their startup business. However, this process is an underappreciated key that will ensure business growth for sure.

Most of the major businesses have gained from it and you too can be on the same list only if you can use it properly and judiciously. It will surely propel your growth trajectories making it seemingly unstoppable. You will not need to raise any extra rounds of funding for your business.

The primary reason for its usefulness is that by raising money using traditional venture capital means you are giving away a piece of your business. In order to get venture funding, you will have to promise a specific percentage of your equity in exchange for the capital. You may lose control of your company as well by that specific percent. Therefore, if you do not want to slice up your business equity any further take on a venture capital loan. This will prove to be an excellent idea especially if you have diluted your control of business already more than your level of comfort.

Reason to choose

There are lots of reasons to choose and use a venture capital loan than any other loan. It takes a lot of time and effort to raise a round of venture capital. It also needs a strategic approach to follow by the founders. All this is not as simple as picking up a phone and calling up an investor you know when you have any cash requirement. These venture loans are exceptionally helpful in situations when you need:

  1. Extending runway between the rounds
  2. Financing a specific project such as marketing
  3. Financing purchase of equipment or inventory
  4. Investing in a specific business opportunity to expedite growth and 
  5. Preventing any further equity to be given off.

In short, these loans will prevent the startup companies from diluting their ownership to the extent where they will no longer have any control over their company that was once their own. They will not have to give up their board seats or their voting rights even.

Reasons not to choose

However, there are times when you should avoid venture capital loans as it may be cheap enough an option. Especially when your company is not in a secure phase to promise hyper-growth, you should abstain from taking on and using such loans.

Venture debt is often termed as “senior debt.” This means this debt will take precedence over all your other outstanding obligations if you ever default on repaying your loan. If you are well aware of the different complicated jargons and terms of traditional business loans, you will easily able to understand that the lender is in the first lien position. Therefore, venture capital lenders can easily and legally seize overall control of your company as well as all of its assets and can even force you to liquidate it.

Therefore, if you know that you are not in a very strong position to repay the loan, you should refrain from taking on a venture capital loan for your startup business.

| About the Guest Author:

Isabella Rossellini is a marketing and communication expert. She also serves as a content developer with many years of experience. She has previously covered an extensive range of topics in her posts, including business and start-ups.

Leave a Comment

Exit mobile version