At BOOST&Co, we’ve specialised in providing venture debt to UK-based SMEs since 2011 – and amid the coronavirus pandemic, this type of fast, flexible funding proved more important than ever. Here, we answer the most frequently asked questions about venture debt, so read on to find out if these loans could work for you.
What is venture debt and how is it different?
Venture debt is a type of fast, flexible funding aimed at fast-growing businesses that have a revenue run rate of more than £2m and a business model with excellent potential for growth. It combines the traditional features of a loan with aspects of venture capital and equity finance. This means that venture debt lenders, unlike many banks, will look at a company’s prospects for growth, rather than its historical financial performance.
Also known as growth capital or private debt, this type of funding is provided by specialist lenders, with loans available earlier and in larger amounts than finance from traditional banks. It is therefore an additional option for SMEs that fall between early-stage venture capital and later-stage bank lending.
Venture debt investors will not take equity or seats on a company’s board of directors, so these loans are an attractive alternative for businesses with a limited trading history and record of profitability that want to avoid dilution or any loss of control. What’s more, investors do not require covenants or personal guarantees, so management teams are not personally responsible for the funding.
Loans can be structured in a way that best suits a business, with funds provided as a lump sum or in tranches. Regardless of a company’s industry, growth or exit strategy, venture debt enables firms to achieve their growth objectives while maintaining equity and control.
- Click here to read our comprehensive guide to venture debt and see some of the successful businesses we’ve helped
How can I prepare my business for venture debt?
Venture debt is provided in the form of loans (generally ranging from £2m to £10m), so companies considering this type of funding need to ensure that their business is able to generate enough cash to service its debt repayments or that there is a clear path to a future round of funding.
From a management perspective, companies seeking venture debt need to ensure that they have a strong and diverse management structure in place. Successful teams have a balanced view of their performance and rely on a diverse team of individuals to make decisions.
What are venture debt investors looking for?
In contrast to equity capital and bank debt, growth capital in the form of venture debt protects the equity of existing shareholders, provides a lower cost of capital and delivers a faster funding process. It is important to note, however, that this debt must be repaid over a predetermined fixed term, which can impact on a company’s cash flow. This means that, when management teams meet investors, it is important that they can show strong momentum in terms of growth.
Unlike traditional banks, growth capital lenders look at a company’s potential for growth, rather than its past performance, so businesses applying for funding should develop clean, robust and realistic financial forecasts. These should include a fully funded business plan, achievable forecasts and clear assumptions on funding, KPIs, revenue build-up, cost structures and working capital dynamics.
The controlled risk profile of businesses at the scale-up stage is particularly suited to growth debt, so companies should highlight any opportunities to scale. These should indicate that the business model is proven – an important consideration for venture debt lenders – and should show that the company needs additional resources to grow, via strategies such as expanding to new locations, hiring more staff or investing in production capacity and product development.
To increase their appeal to venture debt investors, firms should provide attractive but realistic business plans that show how the debt can be serviced. Companies should also be able to provide good visibility on downside protection factors, including future revenues, potential cost reductions, assets that could be liquidated and potential third-party buyers.
- Click here to read expert tips on preparing for your first meeting with investors, from BOOST&Co’s partner Sonia Powar
How can I use venture debt to help my business grow?
Venture debt can be used to fund a number of growth strategies, such as:
- Opening new sites
- Extending a firm’s cash runway
- Providing working capital
- Hiring more staff
- Expanding sales and marketing
- Product development
- M&A activity
Growth capital lenders invest in companies that have a proven business model and have reached the point of scalability, so they do not intervene in management and do not take seats on the board or voting rights. However, specialist lenders are able to provide support in the form of mentoring, guidance and introductions, thanks to their investment and market experience, their exposure to large numbers of fast-growing organisations and their relationships with other investors and industry players.
BOOST&Co is one of these lenders, and we’re always looking for fast-growing, innovative companies that can benefit from our expertise. So, if venture debt sounds like the product for you, get in touch using the details below. We’re always keen to hear from businesses that are ready to grow.