Venture Debt Financing
“Venture Debt Financing” may not be as popular as to that of “Venture Capitalism” in terms of contrast in the business world. But industry experts are especially directing entrepreneurs towards the Venture Debt Financing, rather than Venture Capitalism in recent times.
Reason? It’s Simple! Venture Debt Financing not only provides you the necessary funds to begin your start – up, but doesn’t’ take much of your equity. Thereby, leaving you with the major stake in your company and allowing you to take decisions that can accelerate your company’s growth without any interference, as much opposed in the case of Venture Capitalism.
In case of Venture Debt Financing, non-banking institution like Angel Investors, Non-Banking Financial Companies (NBFCs) and even individual companies lend money to Small and Medium Enterprises (SMEs). Depending on which side of the world you are living, the interest rates also vary from as little as 5%-17% across the world map.
Venture Debt Financing (VDF) institutions also fund the companies that are pre – existing and supported by Venture Capitalism. In these cases, funding in the form of Venture Debt Financing comes from local companies, individuals and even Venture Capitalism (VC).
How VDF Works?
To start with “How VDF Works,” one needs to know how to acquire the VDF in the first place. It’s much similar to the traditional method of securing loan from Banking Institutions. In case of VDF’s, the people who are ready to fund needs to trust and believe that your business proposal would be successful in the market, and you would be able to pay them back the borrowed funds in a given time span at a pre-sorted interest rate.
Then the amount acquired from the funding, will be used to begin the start–up and a nominal amount of cash is paid towards the monthly interest while running the company parallelly.
The loan period is usually from 24 months – 48 months, giving the companyenough time to repay its debt. In most of the cases the VDF will also include a warrant to buy the company’s shares at a fixed price in return for 5% to 15% of the total loan inherited by the company. Usually, the VDFs equity in the company is <3%.
In case of default of loan repayment, the funder can also lien the assets of the company and can also take over the company as itself legally. So it’s highly important for anyone looking after a Venture Debt Finance to begin their start – up promising that, they have a business plan that’s going to work in their favor.
Seeing at the larger picture, Venture Capital and other forms of funding initially might seem healthy, as one need not pay any amount back to the investor. But one has to realize, this only comes at the cost of losing the control over the company. On the other hand, Venture Debt Financing, ensures that, the loans need to be repaid in the given time, and would also mean much of the equity is retained with the company without sacrificing much.