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- Venture Debt combines the traditional bank-led business loan model with aspects of venture capital equity investment. Thus it is a hybrid product which provides a higher and earlier amount of funding without the need to cede equity to new investors
What Is Venture Debt
Venture Debt is a capital investment that is designed for fast-growing business with the potential for significant scale-up. It is generally provided by non-bank lenders. Venture Debt is very effective for high growth businesses that require external investment to facilitate their next phase of growth.
It is available to established SME business that is pre-profit but has an established business model and clear and achievable growth prospects. By its very nature, Venture Debt is available earlier on in the business’ life cycle and larger amounts than would be achievable with traditional bank lenders.
- Proven business model
- Revenues of £2m +
- High growth potential
- Contracted or recurring income
- Assets on the balance sheet
Venture Debt Uses
Venture debt growth capital can be used in a myriad of ways, including for the following purposes:
Extending the cash runway
A venture debt loan can provide a useful source of headroom for a loss-making business as it closes in on profitability. Venture Debt lenders tend to focus on the enterprise value of a business and the business model as opposed to the business’ historic financial performance. Businesses need to be generating revenue but don’t necessarily need to be profitable.
Funding M&A activity
Business expansion is often increased via a growth strategy based on mergers and acquisitions. However, this growth model requires finance to be in place as this will the ability to capitalise on opportunities. Once secured Venture Debt can be drawn down over time – making it perfectly suited to acquisition growth strategies.
Managing cash flow is vital for all businesses, especially high growth ones. Finance for working capital needs is often needed and can be increasingly difficult to source – especially for business yet to make a profit or for relatively young businesses. The flexibility of venture debt makes it well-suited to this purpose.
Supporting capital expenditure
Businesses with high growth often struggle to fund investments that would secure further growth. Typically these are equipment purchases, software licenses, and premises upgrades. Venture debt is available in tranches which means SME’s can plan for future investments.
Venture Debt Pricing
Venture Debt is typically priced on a case by case basis and is unique to the individual borrower and their circumstances. For example and company at an earlier stage of development or a business with a projected higher cash burn rate would expect to pay more.
Venture Debt would usually incorporate three fee elements:-
- Arrangement Fee which is usually between 1-2% of the loan amount
- An annual interest rate of between 10% – 12%
- An equity kicker worth between 10% – 20% of the loan
This final element is typically structured as a warrant giving the lender the right to buy a small portion of equity at a fixed price during the term of the loan.
Venture Debt Structure
Venture Debt varies in size from £1m to £10m and are typically repayable over terms ranging from 36 to 60 months. These loans can be structured to suit the borrower – some companies choose to draw down funding in tranches as and when they need the money. This reduces the total interest cost. And while repayments usually include both interest and capital, some borrowers opt for an interest-only period at the beginning of the loan of between six and 12 months. Some loans include covenants the company must meet, but others don’t.
Venture debt isn’t suitable for every young business. While it may appear more expensive than traditional bank finance, it does provide fast-growing SMEs with access to non-dilutive debt finance that can be used for various types of growth. Venture Debt provides a higher level of funding, faster and earlier in a businesses life cycle. There is typically no fixed criteria, ratio testing or covenants.
Securing debt through traditional bank lending can prove difficult for many SME businesses and leave many feeling that they have little choice. This leads many to consider giving equity away to fund future growth. But by doing so owners have to relinquish large amounts of ownership and possibly overall control of their businesses.
When working with Oakmead you can be assured that we care as much about your business as you do. Our experienced team work with high street banks and specialist lenders to source and arrange a business cashflow loan tailored to our Clients requirements and circumstances. We take into account our Clients needs, timeframes and their plans moving forward and we will make appropriate recommendations based on this information. Ultimately our professional and comprehensive approach makes the process of obtaining a business cashflow loan hassle-free and delivers a simple and affordable solution to help our Clients grow with confidence.
We work hard to reduce all jargon, red tape and bureaucracy and aim to make the process to obtain finance as simple and hassle-free as possible.
An Oakmead client
“The assistance we received from Oakmead Finance made it possible to open our new site. The help from Richard and the team has been fantastic and gave me one less thing to worry about. There was no waiting for a decision. They worked to our timescales and generated an offer of a facility within 48 hours. This meant we were able to get up and trading as soon as possible.”
An Oakmead client
“Having a Purchase Funding facility in place is a huge benefit. We work with Oakmead Finance more as a partner than a customer and the team’s expertise and knowledge of the market is undoubtedly a huge advantage for us.”
An Oakmead client
Richard and his team at Oakmead were exceptional (again). They are a trusted source of advice for us.”
An Oakmead client
“It was refreshing to deal with a firm which has the experience and knowledge to challenge our business plans and make well a structured proposal on how we may do things better, rather than just giving us what we thought we wanted. We are now in a far better place than we might have been thanks to Oakmead Finance.”
Mr Jenkins – Property owner
“Fantastic service. I have been using Oakmead Finance for a while now. They are professional in their dealings, as well as being honest and open."
“I was faced with the real prospect of having to sell my property portfolio which I had built up over many years. Peter and his team were brilliant. They didn’t just stop when they had found a lender, but continued to try and find the best deal for me. Despite challenging circumstances, they were innovative, straightforward to deal with and made the whole process as stress-free as possible for me. I would thoroughly recommend them.”
“I have been absolutely thrilled with Oakmead Finance. They worked on this with professionalism and a spirit that has been magnificent — consistently, at every stage of every twist and turn. I am genuinely in your debt, and hope over time to be able to give back a tiny bit of all I received from you.”
Key Features Of Venture Debt
Venture Debt combines the traditional bank-led business loan model with aspects of venture capital equity investment. Thus a hybrid product which provides higher and earlier amounts of funding without the need to cede equity to new investors.
It is an attractive funding mechanism for those businesses which do not have the required collateral or cashflow to secure standard bank lending products. Venture Debt providers will assess a businesses enterprise value as well as assessing the businesses future growth prospects.
But, because Venture Debt providers are more interested in a business current and project financial performance (rather than its historic) funding is open to younger businesses.