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Venture Debt Financing

Venture Debt is a flexible term loan designed to help start-ups and scale-ups (typically Series A, B, and C), who are fast-growing but pre-profit. Venture debt is often used to provide runway extension to the next round of fund raising or to help reach strategic milestones.

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Key features

  • For term loans, the interest-only period would range from 6 to 18 months followed by the amortisation period which runs until the end of the term. Revolving loans require full repayment at maturity, with interest paid in arrears typically on a quarterly basis.

  • Typically 24 - 36 months.

  • Lender receives right, but not the obligation, to purchase equity at future date to share in potential upside if company excels.

  • Typically structured with security taken over all assets.

The benefits

  • Bespoke financial covenants specific to high growth, loss-making businesses.

  • These facilities are typically a less dilutive form of capital when compared to an equity raise. Whilst there will typically be a requirement for the borrower to provide the lender with a warrant as part of the transaction, this will likely mean the borrower is giving away a smaller portion of ownership than if they raised the same amount of capital through an equity raise. This can be a more capital efficient way of funding operations, cash runway or working capital.

  • While venture debt should not be used to replace venture capital investment, when used alongside equity financing, venture debt can allow you to raise capital while reduce dilution for founders or shareholders.

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Reminder: ‘To borrow or not to borrow? Borrow only if you can repay!’

HSBC Innovation Banking refers to HSBC’s worldwide innovation banking business and is not indicative of any legal entity or relationship.