What is venture lending? 

Venture lending is also known as venture debt. It’s a way of funding where lenders provide loans to startups or high-growth companies. Debt used to be hard to come by for companies like these. But things have changed. Traditional banks are still out of the picture, but lately, there's been a surge in other options. These alternatives let startups get the cash they need through debt.

Venture lending is such an option. As an alternative funding instrument, venture lending is outside the scope of traditional banks. Specialized banks and non-bank lenders like credit funds provide it.

Companies utilizing venture lending are required to repay it, including interest and potential equity warrants. Companies utilizing venture lending are required to repay it, including interest and potential equity warrants. Unlike bank loans, less collateral is required.

Venture lending is by no means a niche product: in Europe, around €28.1 billion was invested in startups in 2022. Among the most active investors in debt funding rounds were the European Investment Bank, Bpifrance, BNP Paribas, Deutsche Bank, and HSBC.

re:cap vs. venture lending

Funding from re:cap has a similar approach to it but it's slightly different in certain aspects. We offer flexible and long-term debt financing, tailored to a company’s cash flow needs. Our funding can be adjusted monthly if needed.

However, using re:cap is entirely non-dilutive, accompanied by lower cost of capital as we do not include equity warrants or covenants.

Learn more about re:cap vs. venture lending.

How does venture lending work?

Venture lending has several key characteristics that companies need to consider in advance.

Term loan or credit line

In venture lending, loans are typically structured as term loans or lines of credit.

Term loans provide a large amount of capital upfront, which the startup repays over a set period with interest. This provides predictability but locks the company into the loan for several years and causes overfunding due to capital which isn’t deployed.

A credit line, on the other hand, offers a revolving credit facility that startups can draw from as needed. It is a more flexible funding approach. Companies avoid overfunding and thus unnecessary cost of capital. 

Venture lending fuels growth

Venture lending is especially relevant for startups and early-stage companies that want to grow their business. Since those growth initiatives are capital-intensive, companies need additional cash. However, they don’t want to sell shares to get funding and thus dilute their ownership further. 

Filling the gap between equity rounds

Venture lending typically follows venture capital – it's somewhat of an unwritten rule. Companies pursuing such a high-risk loan often have prior equity funding from a VC investor.

Venture lending serves as a bridge between two VC funding rounds, allowing companies to fill the gap without relinquishing excessive shares.

Repayment terms

Venture lending is typically repaid within 18 months to 3 years, often from the proceeds of the next equity financing round.

It can be non-dilutive

Venture lending is often described as non-dilutive compared to VCs because it doesn't involve the issuance of new shares, which would dilute existing shareholders' ownership stakes in the company. However, venture lending is not fully non-dilutive due to equity warrants and convertible debt which might be part of the venture lending agreement.

Visible costs: high-interest rates

Venture lending typically comes with higher interest rates and fees compared to traditional bank loans. Since venture lenders assume higher risks by lending to early-stage startups with limited operating histories, they often charge higher interest rates to compensate for this risk (up to 25%). 

Hidden costs: warrants and covenants

Venture lending may include equity warrants (options to buy shares), which can dilute ownership and increase the overall cost of capital. Additionally, they can increase complexity and add uncertainty to the capital structure. 

Venture lending agreements often include financial covenants that require startups to meet certain performance metrics, such as revenue targets. Failing to meet these covenants can trigger default provisions and lead to penalties, increased interest rates, or even the acceleration of repayment obligations.

Be aware of potential overleveraging

Taking on debt can increase a startup's financial leverage, making it more vulnerable to financial distress if the business encounters challenges or experiences a downturn. 

If a company is unable to generate sufficient cash flow to meet its debt obligations, it may face liquidity problems. Therefore, young businesses must carefully assess their ability to service debt and avoid overleveraging their balance sheets.

Conclusion: venture lending for companies

Venture lending has emerged as a compelling alternative for startups seeking capital between VC rounds. While it avoids ownership dilution, venture lending comes with its own set of considerations. 

Higher interest rates, potential equity warrants, and stricter financial covenants can impact a company's financial health and cash balance. However, careful planning and measured use can fuel strategic growth without sacrificing ownership control. 

Ultimately, venture lending presents a valuable tool for startups to navigate the funding landscape, but it requires a thoughtful approach to manage the associated risks.