There are multiple startup companies and small-scale businesses that have to shut down because of a lack of capital funds. Thanks to the concept of venture debt that early-seed companies can utilize. Venture debt acts as a loan to such businesses, providing liquidity for a short term or medium term. Banks and other financial entities fund such companies to cater to the working capital needs of such companies.

Venture debt types

Three types of venture debt are considered for financing.

1. Equipment Financing

This is a type of funding that enables companies to fund the equipment and tools vital for the operation or functioning of the business.

2. Accounts Receivables Financing

This is a kind of funding that the lenders offer against the accounts receivable, manifested in the financial statements of the borrower enterprise or company.

3. Growth Capital

It is a type of financing that acts as a generator for working capital and significant financing. The name growth capital is apt, as such funding helps businesses with capital financing and accelerates the growth of the business.

Venture debt versus venture capital

One must understand that venture debt and venture capital are two different concepts. There are some significant differences between the two, which makes it easier for people to understand the concepts.

•   One of the major differences is that venture debt is a loan that needs to be repaid, unlike venture capital.
•   There are no equity stocks issued in venture debt, which indicates capital control is not diluted. On the other hand, capital control is weakened in the case of venture capital.
•   The terms and conditions are more stringent concerning venture debts when compared to venture capital. Furthermore, the outcome of not meeting the conditions of a venture debt is harsher and more severe than venture capital.
•   Venture debt is compared to be a cheaper option than venture capital.

Critical advantages of venture debt

Several start-ups and early-stage companies are considering venture debt because of its multiple advantages. Some of the key benefits are stated below.

•   Raising funds via venture debt seems easier for start-up businesses once they have successfully acquired venture capital.
•   Venture debt can provide an enterprise more time to develop before the subsequent funding round commences when some investors might exit
•   The companies can get financing without weakening their control by providing equity shares.
•   When compared to equity funds, raising capital via venture debt seems way cheaper.
•   Finally, venture debt has a reputation for catering to the growth goals and objectives of companies.

Conclusion

Failure to make repayments of the debt amount leads to severe penalties and even risks of bankruptcy. But, companies going for venture debt ensure the highest creditworthiness. The best part about venture debt funding is that it helps businesses to enhance their growth and performance rapidly. The financing arrangement is usually made by start-ups and businesses still in the early phases and desperately need working capital. All types of start-up companies can access venture debt, as also innovative companies that have passed a couple of funding rounds with investors (private).

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