For both types of venture debt sources, Banks and Funds, terms have been largely unchanged over the past quarter, even with an increase in rates by the Fed. Though companies looking for venture debt capital via Banks can expect to pay a little more than the 3.5% bank rates they might have experienced previously. That said, almost all lenders are being more cautious as we head towards the end of the year and talks of a recession continue. When making the decision on which route of venture debt to go with, it is important to understand what each type of venture debt offers. Here’s what to expect for terms for both Banks and Funds in today’s environment.
Banks o 4-6% rate o Length interest-only period, 18 months – full-term o 36-48-month term o Loans or Lines of Credit o Warrant coverage <0.5% of the current cap table o Liquidity and performance-to-plan covenants o Where they focus: Current liquidity, investor names & support
Venture Debt Funds o 7-12% rate (a bit more of a range based on their other terms and the size of their deals) o 9-18 Month interest only periods o Loans or Lines of Credit o Warrant Coverage of <1% of the current cap table o Covenants are minimal to none o Where they focus: Business performance, ability to manage cash, less focused on absolute liquidity and investor support
Both banks and funds have their respective pros and cons and it’s the job of someone experienced in the venture debt space to evaluate and advise on the best solution for each company. Each company has its own unique needs, goals, and plans and having the right debt partner is critical – and that’s not always the partner with the lowest rate. Venture Debt continues to be a cheaper alternative to equity and is an effective way to secure the capital needed for growth-stage companies’ continued growth without taking on dilutive equity in a market where valuations are depressed.