What is venture debt?

The amount of capital raised in the UK’s venture debt market is predicted to surpass $1 billion USD by the end of this year. Comparing this with somewhere like the USA (which is predicted to raise more than $27 billion USD in the same year) it’s clear that the UK’s venture debt market is a fraction of the global funding available. That said, a billion is still a substantial amount and worth considering.

So, what is venture debt, is it suited to your business and how can you apply for it?

What is venture debt?

Have you experienced strong growth? Are you putting together proposals for your next funding round? Approaching investors? Working on a pitch deck? Have you raised equity finance in the past and are looking to extend your runway without further diluting ownership?

Funding rounds are exciting, after all, any day could spell a huge windfall. But they can also be long, with large gaps between rounds, during which you still need to pay employees, pay your rent, and keep the business running.

Unlike business loans, which can be hard for startups to gain access to, venture debt is a specialised form of debt financing. It is specifically designed to support startups to keep up with working capital costs between funding rounds.

It can be used alongside equity finance. It doesn't require ownership dilution, and can be used for a wide range of business costs including hiring, growth initiatives, and product development.

What’s the difference between venture capital and venture debt?

It can be easy to mix up venture debt and venture capital (VC), but the two are very different. Venture capital is a type of equity finance. Essentially, a company invests in your business, meaning they purchase a portion of your company.

This means you lose some ownership, but the trade off is that you don’t have to repay the investment in the same way you would with a loan.

Venture debt is a type of debt finance. It has set repayment terms and the lender won't own part of the business. It might look a little something like this:

• You start with seed money. This might be a personal investment from money you have saved up coupled with some investment from friends and family

• You might follow that up with a funding round from an investor in the form of equity finance

• Let’s say, you experience strong growth. You already have enough advisors and partners, but you believe your business is well set up for strong upcoming growth. You then might look towards something like venture capital. While you’re trying to secure the VC investment, you need some intermediary funds. In this case, you might take out venture debt to tide you over while you pitch venture capitalists

Venture debt vs equity finance vs debt finance: what’s the difference?

Equity finance is when an investor purchases a piece of your business. Debt finance is when you take out finance, eg a business loan, which you repay over a predetermined period of time.

Examples of this might be bridging loans, which bridge gaps between funding, unsecured business loans, which can be used to cover working capital costs and don’t require an asset to be used as collateral, and asset finance, which spreads the cost of an asset. Venture debt is a form of debt finance that is used to cover working capital costs while businesses wait for equity finance to come through.

So, what’s the difference between venture debt and debt finance?

A lot of the difference resides in the process. Business lenders usually focus on cash flow projections, revenue statements, and business details. Venture debt focuses more on historic equity funding rounds to determine eligibility. This can make it more helpful for startups who often don’t have the long-standing history of profitability a more established business might have.

Pros of venture debt

There are several reasons high-growth startups look towards venture debt, including some of the following.

Designed for startups

Unlike many types of business loans, venture debt is designed for startups. If you’re a startup with limited revenue history but have strong funding round success, venture debt may be more accessible.

Extended runway

Venture debt can give you the time and working capital you need to extend your runway by several months to a year while you work on securing your next funding round.

No equity dilution

Unlike venture capital funding, venture debt doesn’t require selling shares, so you don’t need to dilute your ownership in the business.

No loss of control

Many funding rounds include the addition of a new board member, which can be great. But if you’re only looking for enough funding to keep the lights on for a year while you work on securing ‘the big one,’ you might not want an additional board member getting a seat at the table in the meantime. Venture debt doesn’t require the addition of new board members.

Venture debt risks and drawbacks

There are risks to all funding types. Here are some of the drawbacks associated with venture debt.

Not designed for all startups

Venture debt is designed for some startups, namely, startups who have experienced strong funding rounds, are projected to see high growth, and have a clear path to profitability. Unfortunately, that’s not the case for all startups. Struggling startups would likely find qualifying for venture debt either difficult or impossible.

Hard to access

Even as one of the startups that do fit the criteria, you may still find it difficult to access venture debt. Being such a specialised type of debt, it isn't offered by many lenders.

Pressure on cash flow

While the initial lump sum would help support working capital, the regular repayments can begin to put a strain on your cash flow as they eat into profitability.

High interest rates

Venture debt may come with higher interest rates or larger fees than something like a commercial mortgage, which is a type of long-term debt with more favourable terms.

Find venture debt with Funding Options by Tide

Need working capital support between equity funding rounds? We may be able to help. Submit your information via the link below to find out if you’re eligible for up to £20 million in funding. We work with many of the UK’s specialist lenders and can let you know if you’re eligible without running a hard check against your credit record.

Find venture debt.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.