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An Overview Of Venture Debt

Enterprise value loans can broadly be defined as loans to companies that lack hard assets or positive cash flows and are therefore unable to qualify for traditional bank debt financing. These companies do however have substantial enterprise values capable of supporting debt financing.

Venture Debt is one example of enterprise loans. Despite taking a slightly different approach to lending, some companies like SWK have become a trusted partner in the venture debt space since 2012. There is no generally accepted definition of venture debt, but the information below summarizes the industry broadly while also discussing how SWK deviates from the norms in ways we believe enhances value for their borrower partners.

What is Venture Debt?

As the name suggests, venture debt is non-dilutive loan financing made to earlier-stage innovative companies backed by institutional equity investors. Venture loans are primarily made to companies participating in the innovation economy focused around the life sciences, healthcare, and technology/software sectors.

Venture debt is typically extended to companies that lack hard assets or positive cash flows and are therefore unable to qualify for traditional bank debt financing. Venture loans can be either senior or junior secured term loans and collateralized by a company’s assets, primarily intellectual property.

Credit financings to venture stage companies act as a compliment to equity investments. Venture loans provide leverage to extend the runway between equity rounds and cost-effectively minimize dilution for existing investors.

Types of Venture Debt

The venture debt market can generally be divided into two primary categories: equipment financing and growth capital. Equipment financing is used specifically for the purchase of equipment, and is secured by that equipment alone.

The availability of equipment financing is tied to the actual purchase of equipment, and therefore would not be available to early-stage companies that do not utilize capital equipment in their operations. Due to the existence of hard collateral underpinning the loan, equipment financing can be less costly, but often carries a similar cost of capital to growth capital loans.

Growth capital refers to term loans that can be used for any corporate purpose and is not necessarily collateralized by specific assets in the same way as equipment finance loans. Growth capital term loans are secured by a blanket lien on a company’s assets, which may or may not include a lien on intellectual property. Some lenders may find a negative pledge on a company’s intellectual property to provide sufficient collateral protection without creating a security interest in the asset.

The vast majority of venture loans fit the growth capital definition. Whereas most venture lenders offer growth capital term loans and an increasing number have begun offering both term loans and equipment loans. There are also lenders dedicated to equipment financing that do not have the desire or expertise to extend term loans to earlier-stage companies.

Who Should Consider Venture Debt?

Just because a company is early in its evolution as a business, does not mean that it will be an ideal candidate for accessing venture debt. Venture debt borrowers tend to display many or most of the following qualities:

  • Have received $5mm+ in equity financing from well-funded and well-regarded institutional investors
  • Are currently raising or have recently raised an equity round of financing.
  • Most venture loans originated between Series A and Series D rounds of equity financing, when borrowers are still growing and not yet profitable.

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