Debt Finance Definitions
4 min read
Venture Debt
Non-dilutive capital for venture backed startups in early and growth stages
- Venture debt is a type of debt financing provided to early-stage, high-growth companies that have already raised equity from venture capital investors. Unlike traditional loans, venture debt is designed to complement equity financing, offering startups additional capital without diluting the ownership stakes of existing shareholders.
- This financing is structured with financial covenants, which may require maintaining certain financial ratios or achieving specific performance targets. Venture debt typically carries higher interest rates and may include warrants, giving lenders the right to purchase equity in the company at a later date.
- The funds from venture debt can be used flexibly for purposes such as working capital, capital expenditures, or runway extension until the next equity round. Overall, venture debt can be a powerful tool for startups seeking to fuel growth while minimizing equity dilution.
Revenue-Based Financing
Funding based on a fixed percentage of gross revenues
- Revenue-Based Financing (RBF) is a type of funding in which a company receives capital in exchange for a fixed percentage of its gross revenues. This financing is appropriate for startups with consistent revenue streams but limited access to traditional loans or equity funding due to a lack of assets or strong credit history. RBF is non-dilutive, meaning business owners do not have to give up equity or ownership.
- Unlike traditional loans, RBF repayments are directly tied to the company’s revenue, and the payment amounts fluctuate with the business’s performance. During high-revenue periods, payments increase, allowing the company to repay the funding more quickly, while during low-revenue periods, payments decrease, providing a cushion during slower times.
- Revenue-Based Financing can be a valuable option for businesses looking for growth capital while maintaining ownership and aligning repayment schedules with their revenue cycles.
Equipment Leasing
Equipment rental agreement with a lender based on a fee schedule
- Equipment Leasing is a financing arrangement where a company rents equipment from a lender based on a predetermined fee schedule. This allows businesses to use essential machinery, technology, or other equipment without the significant upfront costs of purchasing. Payments are spread out over the lease term, upon which companies have the option to purchase the equipment, renew the lease, or return the equipment.
- Equipment leasing provides a cost-effective and flexible solution for businesses needing to access necessary equipment without the financial burden of outright ownership. This is beneficial for startups that need to conserve cash and to stay updated with the latest technology and equipment.
Asset Based Lending
Revolving line of credit or term loan secured by collateral
- Asset Based Lending (ABL) is a financing method where a company obtains a revolving line of credit or term loan secured by its assets as collateral. This model is particularly advantageous for businesses needing flexible financing solutions, as the loan amount is tied to the value of the company’s assets, such as accounts receivable, inventory, equipment, or real estate.
- ABL allows companies to leverage their existing assets to access working capital, supporting growth or operational needs. ABL agreements often include covenants and monitoring requirements to ensure the collateral remains sufficient to secure the loan. The structure of ABL typically involves regular assessments of the collateral’s value, with the borrowing base recalculated periodically to determine the available credit.
Recurring Revenue Lines
Line of credit extended based on a company’s monthly or annual revenue performance
- Recurring Revenue Lines are a type of financing where a line of credit is extended based on a company’s monthly or annual revenue performance. This model is beneficial for businesses with consistent and predictable revenue streams, such as subscription-based services or SaaS companies. By leveraging their recurring revenue, businesses can access flexible financing without the need for traditional collateral.
- The structure of a recurring revenue line typically involves an assessment of the company’s revenue history and performance metrics. The credit limit is then determined based on the stability and predictability of these revenues. This financing solution allows businesses to manage cash flow more effectively, support growth initiatives, and bridge gaps between revenue cycles without compromising ownership or taking on high-interest debt. It is also a scalable option, with the potential to increase the credit line as the company’s recurring revenue grows.
Subordinated Debt
Junior loan providing additional flexibility within a capital stack
- Subordinated Debt, also known as junior debt, is a type of loan that ranks below other senior debts in terms of claims on assets or earnings. This financing option is designed to provide additional flexibility within a company’s capital stack.
- Subordinated debt typically offers higher interest rates than senior debt due to its lower priority in repayment. This type of debt allows companies to raise additional capital without diluting equity, providing a balance between debt and equity financing.
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