Venture Debt is a flexible term loan designed to help start-ups and scale-ups (typically Series A, B, and C), who are fast-growing but pre-profit. Venture debt is often used to provide runway extension to the next round of fund raising or to help reach strategic milestones.
Venture Debt Financing
Back to HSBC Innovation BankingPowering startups and scale ups
Resources
Venture Debt FAQs
Venture debt is a powerful tool to grow your business - But what is it, how is it different to equity, and who is eligible? This article answers those pressing FAQs.
Venture debt: Timing is everything
Venture debt can accelerate growth, but it’s important to choose the right time to take debt on. Here are some key questions to ask if you’re considering debt.
Venture debt and equity
How do these financing options work together? Venture debt can only be unlocked by venture-backed businesses. But what other aspects should you consider before taking on debt.
Key features
Interest Only Period
For term loans, the interest-only period would range from 6 to 18 months followed by the amortisation period which runs until the end of the term. Revolving loans require full repayment at maturity, with interest paid in arrears typically on a quarterly basis.
Term aligned to growth trajectory
Typically 24 - 36 months.
Warrant
Lender receives right, but not the obligation, to purchase equity at future date to share in potential upside if company excels.
Security
Typically structured with security taken over all assets.
Who can apply for venture debt?
Venture debt is typically available to venture capital-backed businesses - whether early-stage companies or more mature companies that are actively choosing to focus on high growth over profit. That means it’s not an option for bootstrapped business, who could consider traditional debt options such as cashflow-based term loans or asset-based lines of credit if they have positive cash flow.
The benefits
Flexible
Bespoke financial covenants specific to high growth, loss-making businesses.
Cost efficient
These facilities are typically a less dilutive form of capital when compared to an equity raise. Whilst there will typically be a requirement for the borrower to provide the lender with a warrant as part of the transaction, this will likely mean the borrower is giving away a smaller portion of ownership than if they raised the same amount of capital through an equity raise. This can be a more capital efficient way of funding operations, cash runway or working capital.
Complementary
While venture debt should not be used to replace venture capital investment, when used alongside equity financing, venture debt can allow you to raise capital while reduce dilution for founders or shareholders.
Reminder: To borrow or not to borrow? Borrow only if you can repay!
HSBC Innovation Banking refers to HSBC’s worldwide innovation banking business and is not indicative of any legal entity or relationship.
