Pros and Cons of Venture Debt
Start-Up would be an individual’s dream. But to make that dream come true, one need to know various sectors, their insights and in depths to become a successful entrepreneur. Especially at the time of acquiring funds, one needs to know the viable options and look after the pros and cons. Investments that require funding at corporate level, Venture Debt Financing would come in hand. We are listing out pros and cons of the Venture Debt Financing procedure:
PROS of Venture Debt
Larger Equity
Taking a Venture Debt option for starting a company, would leave the company founders with much larger equity than opposed in case of Venture Capital. Larger equity means, one has the freedom and free swing to take crucial decisions thereby rescuing the company’s interests and goals, rather than driving towards a “Profit Based” management.
Higher Evaluation
Venture Debt Financing allows the company to have more time between equity rounds, thereby allowing the company to be built and achieve critical milestone. This would indeed increase the company’s valuation, thereby having greater potential for greater valuation.
Reach IPO’s earlier
Larger equity and Higher Evaluation greatly enhance the chances of filing for an Initial Public Offering-IPO. Once a company reaches a definite set of milestones in a certain period, and it is expected to go ahead with the same rate of development under the current management, a company can file for an IPO by selling a stake of their company in the public outpost, thereby making it a Public Listed Company. This helps to upscale the business at a greater rate and continue expansion.
CONS of Venture Debt
Risk Factor
If your start-up is placed in a high-risk environment of business, then acquiring a Venture Debt Funding would be quite hard. No one would be giving loan to any start-up that might show the signs of possible or even “mere” downfall in the open market. Even though one secures Debt Financing for such kinds of projects / companies, the T&C on which the loan will be sanctioned may not be really that favorable to the company’s growth in the future.
Hampering Growth
If the funds are not utilized properly, it can hamper the company’s growth and expansion. As one is always reminded of the constant pay towards the monthly payments, situations might arise at times, where the same debt financing which proved to be helpful might can even become an obstacle to future equity raises. This would put the company’s evaluation at risk, and can have an impact if the company is listed in the IPO sector due to poor raise in equity in the future.
Falling Back
Due to a constant check and constraints on the cash flow, resources for product Research & Development might be effected. Thereby, leading to state of losing some “big” opportunities in the market. This indeed would cause the company to fall behind the competitors and lose the share of the existing market.
Recommended Read :
- Bridge Loan Start Ventures
- What is Vendor Financing?
- Raising Fund From Family and Friends for Start Up Venture
- How to Secure a Micro Loan for Start Up Business?
- How to Invest in a Start Up?
- Risks Involved in Start Up Investing
- How Can I Become An Angel Investor?
- How Risky is to Become An Angel Investor?
- What is Bridge Loan?
- How to Become Venture Capitalist?
Overall, the scenario looks quite upbeat and it seems beneficial to go for venture debt. However, I am unsure of the real world scenario for start-ups. What exactly does a start up prefer? Since the news almost always mentions about venture capitalists and venture debts are not mentioned specifically. It would be great if the author can give few examples to get more idea about this mode of funding.
Funding a start-up company involves a lot of risk for the investor as well as the organisation. A little delay in fund may make the plans go hay way. Lot of careful planning is involved. The article critically analysed both the sides without any disparity. Kudos to the writer.