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Venture debt types of financing & lenders FAQs

Compare venture debt structures, from term loans to revenue-based financing, and understand the difference between banks and funds.

5

questions
answered

Which Types of Financing Are Available?

There are dozens of venture debt schemes, each designed for different company profiles and funding needs. Examples include:

 

  • Term Loans - Standard non-recourse loans, typically 1-3 years in length. Some have interest-only payments at the start, then switch to principal plus interest repayments. Others are bullet loans, where the full repayment is due at the end, or a mix of repayment schedules.

  • Venture Loans - Typically for VC-backed companies, similar to term loans but usually longer (3–5 years). Lenders may receive an equity kicker, such as a small warrant (usually less than 1%) or a backend bonus.

  • Revenue-Based Financing - Debt structures (typically 2–4 years) where instead of fixed interest payments, you repay a fixed percentage of your revenues (usually less than 5%) until a cap is reached, often 1.3x-1.5x the principal amount.

  • Credit Lines - Different types exist. Revolving credit lines allow you to repay and re-borrow up to the maximum limit during the agreed period. Other lines may have fixed amounts or be reset periodically, based on revenues, profitability, or other agreed metrics.

  • Equipment, Purchase Order, or Inventory Finance - Typically used by hardware, consumer product or devices companies to finance CAPEX or production.

 

Other financing options include bridge loans, acquisition finance, short-runway extensions, receivables financing, cash advances, marketing finance, cohort financing, and more.

Why is non-recourse debt often preferred?

Tech companies often seek corporate non-recourse debt where the lender’s recovery is limited to specific assets or cash flows of the company, and the lender has no claim beyond those agreed sources.

Typically, in such loans:

  • There is no personal guarantee from founders or shareholders.

  • The lender cannot pursue the parent company (if structured properly) or unrelated assets beyond the defined collateral.

Recovery is limited to the pledged asset, project, or revenue stream.

What is the difference between an ordinary bank loan and a venture loan?

The approaches, process timelines, and underwriting requirements are completely different. The main financial differences include leverage, personal guarantees, risk appetite, and loan terms.

 

For instance, if you are seeking debt equal to 2–5% of your annual revenues, with a 1–2 year repayment period and a personal guarantee, you should probably start by talking to your commercial bank.

 

However, if you are looking for non-recourse debt that is equal to more than 20% of your annual revenues, with a 5-year repayment period, you should probably engage lenders who specialize in venture loans and other credit products for tech companies. These lenders can take on more risk, offer sophisticated financing structures tailored to specific tech company profiles, and understand the language and dynamics of the tech industry.

Bank vs. Private Debt Funds

There are some important differences between banks and private debt funds that provide venture debt and among them:

 

  1. Selectivity: banks are more selective and typically cherry-pick among their clients only the best prospects, often VC-backed companies with a recent equity round.

  2. Financing offered: most banks focus on venture loans or asset-based loans while private debt funds offer many other types of financing such as revenue-based finance, marketing finance, bridge loans and runway extensions. As for credit lines, these are mostly offered by banks due to their capital base and costs.

  3. Interest rates: banks often charge lower interest rates because (a) their cost of capital is lower than private funds, and (b) they can often earn additional banking fees from daily banking transactions.

  4. Deal period: in venture loans banks usually prefer longer-term loans (e.g. 4-5 years), while many private debt funds can accommodate shorter-term loans.

  5. Risk tolerance: banks are more risk-averse and heavily regulated.

  6. Flexibility and predictability: when dealing with default situations Banks often tend to be more predictable but less flexible than private funds.

How do I know if a lender is the wrong fit?

Lenders typically publish only a few criteria for qualified prospects, such as revenue size and revenue model, industry, geography and required growth rate. However, each lender often evaluates dozens of additional parameters that are not publicly disclosed.

As a result, finding the right fit often requires full profiling with each lender, which can be time-consuming given that there are hundreds of lenders. An alternative is to work with an advisor and investment bankers who specialize in debt financing for tech companes and understands the preferences and offerings of multiple lenders. The downside is that often advisors and investment bankers specialized in venture debt are usually costly and seek to work on large transactions ($10M+).

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