Venture Debt: Alternate way of funding for your start-up

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Anuj Goenka, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur


Venture debt is a type of financing option available for businesses backed by venture capitalists. In this option, the owner raise the capital in the form of debt without diluting any stake. It is different from traditional bank lending as it is targeted only towards entities which doesn’t have strong books/cash flow/assets but have disruptive ideas and backed by reputed PE/VC funds. There are no fixed standards and terms for such financing. Typically, a start-up uses this facility for

  • Working Capital Management
  • Balance cash flows: Receivables V/s Payables
  • Capital Expenditure or Growth
  • Amount of capital needed is too small for an equity round

It is complementary to the equity financing route where the owner/promoter sell their stakes to raise capital.

Benefits for Entrepreneurs:

  1. Access to capital without diluting control over business
  2. Regular service of debt increases the goodwill
  3. Can be arranged in a shorter time than equity financing option

Benefits for VCs/PEs:

  1. Reduces the risk of capital loss
  2. Provides handsome return (typically 5-15% above the traditional lending rate)
  3. Larger pool of applicants & Less scrutiny as deal sizes are smaller comparatively to equity route

 

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