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Venture debt is a great alternative financing option that, according to Faskins, was on track for a record high of $543M in Q3 of 2022. And with the market for venture capital growing tremendously, it’s no surprise that venture debt is also growing alongside it.
Many venture-backed startups, SaaS companies, and even fledgling manufacturers use venture debt as an alternative to traditional debt financing. Businesses use this debt to build up company assets, have greater financial flexibility, and fix cash flow issues, among other issues.
The Idea Behind Venture Debt
It’s simple – your business needs more capital to support its needs, and many lenders are enthusiastically looking for promising startups to invest in. They offer you additional funds in the form of debt so you can avoid further dilution you likely faced in the seed round of startup funding.
For example, you raised $600,000 during the seed round, where you were valued at $3,000,000 and then managed to raise another $10,000,000 in Series A while your valuation was at $30,000,000.
You’ve given away a considerable percentage of your shares to your investors by now and want to save additional dilution. With venture debt, you can raise funds to reinvest in R&D, accelerate product development or invest in marketing and sales without diluting ownership further until you get to your Series B.
How Venture Debt Works
Your bank or non-bank lender provides you with a loan secured by non-traditional assets such as grants, tax credits, or your monthly recurring revenue as collateral. Lenders, naturally, want to protect their interests as well, so you’ll also have to account for the following:
- Cost of borrowing the capital.
- Cost throughout the duration of the loan.
- Cost to exit the loan.
A venture debt facility could also feature an initial period where you only pay interest or a complete payment holiday. If it’s a term loan backed by your tax credit, it will be paid when you receive your refund.
But it’s worth it because you get funding for your business, which, if spent wisely, will help you get closer to your long-term or immediate goals and get you to a higher valuation for your next round of funding.
Here are 5 top reasons why startups opt for venture debt.
Tech Startups Trying to Overcome A Cash Crunch
Any company can face a cash flow problem, and 82% of small businesses fail as a result. For tech startups, a cash crunch occurs when certain obligations take up too much of their financial resources, leaving very little behind for day-to-day operations.
Maybe your company gave out slightly too much on developing a new product, or you lost a notable client leading to an unexpected cut in revenue. It could also be a new feature on your app that took too long to roll out, consuming more resources than planned.
While raising equity to overcome these problems can be time-consuming, venture debt can ease immediate financial strains within days.
SaaS Companies Investing In Growth Opportunities
Is your goal to scale your SaaS business’s operations and expand its customer base? Is achieving that goal as simple as pumping more money into sales and marketing? A lack of financial resources will hold you back.
Acquiring fresh talent and increasing your marketing budget to accommodate for more significant ad spend can be financially and practically challenging, for example. A report suggests that 63% of all startups are affected by a lack of talent in their workforce.
Using venture debt to raise finances for hiring sales talent and increasing your customer acquisition investment can be a clever decision as you make your way to increased profitability in the long run.
Extending The Cash Runway For Startups
Venture debt gives expanding startups like yours a boost in valuation, so you’re in a much stronger position for the next institutional equity round. Extending your cash runway to deal with operational expenses is an integral part of that.
You can quickly tick all boxes for critical metrics to enter your next equity round with your confidence peaking.
Additionally, venture debt can work as growth capital for your business when you need enough room to pivot your business model. Think strategically for your long-term interests by planning, testing, and implementing new processes.
Tech Companies Investing Heavily In R&D
Canadian companies investing heavily in research and development may be eligible for the Scientific Research and Experimental Development (SR&ED) tax credit. However, even if your company is qualified, you may have to wait more than a year to get your tax refund and even longer reinvest it. If you’re developing technology, an increased waiting time to roll out a new product amplifies the risk of technology decay.
With SR&ED financing, your company can finance the tax credit quarterly as it accrues and pumps it directly into your R&D efforts instead of waiting a year or more for your SR&ED refund.
Manufacturing Companies Trying To Meet A Large Order
New manufacturing businesses operate on a day-to-day basis. So, It can be difficult for them to fill out large immediate orders because of a lack of capital. Venture debt can be a great alternative financing solution if you:
- Need to pay for raw materials?
- Need bulk transportation for the finished product?
- Need to finalize product development and scale production quickly?
Venture debt finances your needs faster than equity as there’s potential to finalize it in as little as three business days.
Grow Your Business With Venbridge
Do you have a startup in Canada that needs funding to grow? Venbridge has several venture debt solutions that could be an excellent fit for a growing business like yours. Our services empower companies like yours to maximize government incentives, better manage cash flow, and invest more in the areas you need.
Contact us today to discuss how we can help you grow your company through non-dilutive venture debt.
