Venture debt

src: uploads-ssl.webflow.com

Accounts payable or business loans (related: "business leasing") is a type of debt financing provided to a venture-backed company by a special bank or non-bank lender to finance the work capital or capital costs, such as equipment purchases. Accounts payable can equip venture capital and provide value to fast-growing companies and their investors. Unlike traditional bank loans, business debt is available to startups and growths that do not have positive cash flow or important assets to be used as collateral. Venture debt providers combine their loans with warrants, or the right to buy equity, to compensate for risks higher than default.

Accounts payable can be a source of capital for entrepreneurial companies. As a complement to equity financing, business debt provides growth capital to extend the cash base of the startup companies to achieve the next milestone while minimizing equity dilution for employees and investors.

Video Venture debt

Jenis utang usaha

Accounts are typically structured as one of three types:

• Growth capital: Usually term loans, used as a replacement of equity, for M & amp; A, funding milestones or working capital.
• Accounts receivable financing: loans to receivables items on the balance sheet.
• Equipment financing: loans for the purchase of equipment such as network infrastructure.

Venture lenders often bluff the due diligence of venture capital firms.

Although there are more than 100 active business debt providers, they are usually classified into two categories:

1. Commercial banks with a business loan arm.

These banks typically receive deposits from startup companies, and offer business debt to complete their overall service offerings. Accounts payable are usually not bread and butter for this provider. Debt lines from banks start as low as $ 100,000 and to be properly backed up and/or companies with scale, can reach into tens of millions in terms of facility size. Some players in this category are:

• Bridge Bank
• National Bank City
• Comerica (NYSE: CMA)
• East West Bank (NASDAQ: EWBC)
• Silicon Valley Bank (NASDAQ: SIVB)
• Square 1 Bank
• Wells Fargo (NYSE: WFC)

2. Special financial firms ("accounts payable shop")

Commercial banks can sometimes be limited in the size of a loan dollar, or a strict agreement that is attached. Business payables typically provide higher dollar sizes and more flexible loan requirements. Some of the prominent ones are:

• ATEL Capital
• Eastern Capital
• Add Capital
• Hercules Technology Growth Capital (NASDAQ: HTGC) public BDC; has moved on to the next stage of the transaction (think $ 10 million floor funding)
• Horizon Technology Finance (NASDAQ: HRZN) public BDC
• Lighthouse Capital (may be dead on the market now - but still a portfolio left)
• Multiplier Capital (private debt funds)
• North Atlantic Capital (SBIC Fund, loan $ 5MM - $ 10MM)
• ORIX Capital Growth (fka ORIX Ventures - trade arm of Japanese financial services company NYSE: IX)
• Onset Financial (Direct independent capital providers with PE and institutional funding Transactions in the range of $ 250M to $ 50M)
• Oxford Finance (specialization in bio/pharma/health care)
• Pinnacle Ventures (this is a cross-company equity and debt)
• Important Capital Partners (private debt funds)
• Runway Growth Capital (a private BDC with a strategic relationship with Oaktree Capital Transaction $ 10-25mm) www.runwaygrowth.com
• TriplePoint Capital (powered by Wafra)
• Trinity Capital Investment (SBIC Fund, $ 2- $ 15 million, term loan and equipment financing)
• VenSource Capital ($ 500k - $ 5MM, lease and equipment loan)
• Wellington Fund (Canadian based, multi-strategy company)
• Western Technology Investment (private debt funds)

3. Dinamika Industri

As a rule of thumb, the size of an enterprise's venture debt investment is about 1/3 to 1/2 of venture capital (equity). The VC industry is investing about $ 27b in the last 12 months. This would imply about $ 9B of potential debt markets. However, not all VC-supported companies receive business debt, and a recent study estimates that the lender provides a dollar of business debt for every seven invested venture capital investments. This means about $ 3.9b of debt market. There are several philosophies behind various players. As a rule, they all prefer branded VCs that better support potential portfolio companies - some are more militant about this than others. They will universally provide capital to companies that are still in the mode of losing money, with variance around comfort on the time line to break even, subsequent capital rounds, recently raised equities, etc.

Since most new companies enter into debt to add equity, the size of the debt industry follows the movement of the VC industry.

Maps Venture debt

Financing terms

Venture loan lenders expect a 12-25% return on their capital but achieve this through a combination of loan interest and equity returns. The lender is compensated at a higher rate of perceived risk on this loan by gaining additional returns from its equity holdings in the successful company and achieving the sale of the trade or IPO.

Equipment financing may be provided to finance 100% of capital expenditure costs. Accounts receivable financing is typically limited to 80-85% of the outstanding receivables.

Loan terms vary widely, but are different from traditional bank loans in several ways:

• Refund: from 12 months to 48 months. Can be an interest only for one period, followed by interest plus principal, or payment of a balloon (with rolled interest) at the end of the semester.
• Interest rate: varies based on the general yield curve in the market on which the debt is offered. In the US, and Europe, interest for equipment financing is as low as prime rate (US) or LIBOR (UK) or EURIBOR (Europe) plus 1% or 2%. For accounts receivable and growth of capital financing, prime plus 3%. In India, where interest rates are higher, financing can be offered between 14% and 20%.
• Warranties: the provider of the business payables typically requires liens on the borrower's assets such as IP or the company itself, except for equipment loans where the acquired capital asset may be used as collateral.
• Warrant coverage: the lender will ask for a warrant on equity in the range of 5% to 20% of the value of the loan. The percentage of the nominal value of the loan can be converted into equity at the price per share of the last round of venture financing (or simultaneously). Warrants are usually made when the company is acquired or go public, resulting in a 'kicker of equity' back to the creditor.
• The right to invest: Sometimes, the lender may also seek some right to invest in the subsequent equity round of the borrower under the same terms, conditions and rates offered to investors in that round.
• The Covenant: borrowers face fewer operational restrictions or agreements with accounts payable. Accounts receivable loans will typically include some of the minimum profitability or cash flow agreements.

src: www.docsend.com

Venture Debt Value

Over time, start-ups are rewarded to reach major milestones with increased valuation of the company. Most companies require some venture capital infusion to expand and so on, the optimal time to raise funds immediately follows one of these assessment drivers, resulting in less equity dilution for the same amount of capital raised.

There are three main scenarios in which business debt can help develop the company and finance its capital needs more efficiently:

• Extend cash runway to next rating : Venture debt can be used to extend the cash basis of the startup company to the next assessment driver. A company may increase its smaller round of equity and then utilize its debt to ensure that the next round of equity is raised at a higher valuation. Management and employees will benefit from less dilution due to smaller equity gains while existing investors will also benefit from less equity dilution and less cash needed to maintain their holdings.
• Extend cash runway to profitability : Venture debt can extend the company's runway to "positive cash flow". The Company can utilize its debt to fully eliminate the last round of equity financing. The use of this debt reduces the dilution of equity for current employees and investors, and pushes the company forward during the critical period of growth.
• Avoid down spin : Accounts payable can serve as a bearing when the company does not plan and does not have enough money to withstand the round of equity. In cases where the company's performance is not in accordance with its plan, it will likely result in an increase in equity in the lower round. Accounts payable can help bridge the gap until the company gets back on track.

src: thumbor.forbes.com

See also

• Hybrid Security
• Shareholder loans
• Seniority (finance)

src: i.ytimg.com

References

src: i.ytimg.com

External links

• Trade payables in Europe IN VIVO Blog Spot, June 25, 2007.
• Business Debt Rise in Europe BVCA and Winston & amp; Taken, May 2010.
• As an Adult Startup, Beckon Malte Susen Debt Market and Ariadna MasÃÆ'³, February 2015.
• Ventura Blog Venture Blog Columbia Camp Partners, 2015
• Definition of BOOST & amp; Venture Debt Co Nov, 2015
• Determination of Debt and Venture Provisions Spinta Capital LLC Blog, October 2016

Source of the article : Wikipedia