How Does Venture Debt Work?

How Does Venture Debt Work?

September 23, 2021 by investor

Venture debt can reduce dilution and give your startup more runway. Here are a few pointers to see if venture debt is a good fit for your fundraise:

It’s often used with equity funding for purchasing equipment, making acquisitions, or making up for funding not acquired through the equity raise.

If the company is in a difficult cash position, then venture debt will come with higher interest rates. 

If the proposed debt payments are higher than 20% of operating expenses, then it may not be a good fit. 

If the company has stable revenue and predictable receivables, then a line of credit may be a better choice than venture debt. 

Some tie venture debt to the company’s cash or accounts receivable.

Covenants around venture debt such as ‘material adverse change’ can trigger a recall of the debt early.

It helps to understand how the lender performs. Check their past history to find out more.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.