Is Venture Debt Right for my Company? 9 Signs It Is
As a startup founder, you may be exploring your financing options right now and weighing venture capital against venture debt in the process. While there are many instances where venture capital is a smart choice, venture debt also has its specific benefits.
If any of the following rings true, consider exploring venture debt as a financing solution.
1. You Aren’t Ready for Another Round of Funding
You may have received one or more rounds of VC funding already, but maybe you don’t want to dilute your valuation further by taking another round. Or your valuation might not be where you think it could be right now, and you don’t want to take funding at the current valuation.
Either way, venture debt could be a good source of funding between rounds.
2. You Need Working Capital
Maybe business is booming, and you need working capital to fund the growth of your core business and fulfill existing customer demand. Just because your startup is thriving doesn’t mean you have enough cash on hand to cover expenses for both the day-to-day and growth strategy, and that’s where venture debt comes in.
3. You’re Ready to Invest in Sales and Marketing
Looking to achieve new business milestones to increase valuation in advance of your next round? You may need to up your spending on sales and marketing. Whether that means hiring full-time staff, investing in ads, or hiring a consultant to get your product in front of more customers, it’s going to require capital.
4. You Want Insurance
Rare is the startup that stays under budget, especially in the growth phase. Venture debt can provide insurance, in a sense, in case you need more cash than you estimated with your last round of funding to reach profitability.
5. You Are Looking to Acquire Another Company
There’s a great opportunity to acquire a company and expand your footprint, but it requires capital, and since you didn’t anticipate this acquisition before your last round of funding, you may still need financing to get it.
6. You Want to Accelerate Growth Without Raising More Equity
Perhaps you have raised equity capital to prove product/market fit and solved unit economics, but now you’re ready to accelerate growth. However, taking on VC funding would dilute your equity, and you don’t want that. Venture debt allows you to grow rapidly without raising more equity.
7. You Don’t Qualify for Traditional Financing
Banks are notorious for turning down startups, often because their credit scores aren’t high enough, because they haven’t been in business long enough, or they lack hard asset collateral. If you have demonstrated strong growth, venture debt may be a viable solution.
8. You Have Seasonal Swings in Demand
Not every business sees steady revenue year-round, and many startups see fluctuations in the early and mid stages. If yours varies throughout the year, having access to a line of credit may help you better manage cash flow. You can borrow the funds you need when cash is low, when you need it, and as cash ramps up repay the line of credit, then have access to the funds again.
9. You Want to Build New Products or Enter New Markets
Whether those milestones are product or market-related, you need investment today, not down the road. Waiting for your next round of funding could cause you to miss those milestones, but venture debt can help you reach and surpass them.
When Venture Debt Isn’t a Good Fit
All that being said, it isn’t always the best choice for some startups.
If you’re considering it as last-resort financing, it’s probably not a good idea, and if your books show you’ve been struggling (maybe your revenue has been fairly unsteady for years), lenders will be less likely to want to give you a loan, given your high risk factor.
If you aren’t crystal clear on how you will use the funds, venture debt may not be the best solution. It’s all too easy to get a lump sum of cash and then feel like it slipped through your fingers without you knowing where it went. Any investment you take, be it debt or equity, should move your startup forward.
Before Choosing Venture Debt
If you feel like it could be the best option for your startup, decide how you will use the funds. Create a budget to ensure you borrow enough and have a plan for where every cent will go.
Have a plan for paying back the funds. Repayment terms are usually shorter than other business loans, such as SBA loans, so you may have a larger monthly payment due soon.
Choose a firm that fits your needs. Some firms require you to already have traditional VC backing. PFG does not. Even if you have never received backing, you may qualify for custom debt capital loans.
Venture debt can be a fantastic financial vehicle if it’s the right fit. Know why you’re borrowing the money, how it will take your startup to the next level, and how you will pay it back to maximize its usefulness. If you have any further questions, you can get in touch with us here.