A lot of us have been wanting to finally kick off that dream business, small or big, it doesn’t matter. What truly matters in business start-ups are your attitude and your capital. We will reserve the attitude topic on the experts and focus on the capital side of starting up your first murray priestley style business.
Finding sources of capital could be a tedious and stressful at times. There’s your savings, your family and friends, angel investors, banks, and other financing entities. There also exists what we call venture debt.
What is venture debt?
Venture debt is a loanable amount provided by specialized banks or financial institutions to entrepreneurs, old or new business, to fund working capital. Usually structured in a three-year loan way, venture debt claims company stock as payment.
This option is best for those who could not afford traditional debt financing and require or flexibility in their finances. When structured and managed effectively, venture debt is the best risk capital form a business can utilize.
How is it helpful in starting up a business?
In the business world, especially in the early stages, milestones are very important but critical. The main objective of any owner is to increase the value of the company. This value is manifested during the future rounds of financing and initial public offering or IPO. The development of the business and the significant increase in value are dependent on the capital invested in. It has been proven that the valuation of startups is higher using a debt and equity formula compared to equity alone. Venture debts help entrepreneurs in securing capital intended to improve the valuation margin for the next round of financing, help the business achieve milestones and to avoid dilution by having additional capital at an earlier time.
In comparison to traditional equity financing or loans, venture debt is faster and easier to arrange. Venture debt financing does not necessarily conduct valuation to applicants which makes the process efficient to both parties. This time buying and added capital are helpful in advancing in a new round of equity financing, improving competition among other companies and plus points in getting that equity loan approval. This is also a big help during a pre-selling period and to avoid price negotiations between the management and the investors.
Interest rates of venture debts average from 10 to 15 %. Repayment is generally on a monthly basis and has no financial covenant. Interest rate is higher compared to convertible debt and a traditional working capital loan but the latter two also stay behind venture leasing in terms of flexibility and immediate support to business that is crucial in achieving its financial goals.
Venture leasing has been around for a long time now but many are still hesitant to try because of the risks involved and the growing fear of scams worldwide. With sufficient knowledge and right judgment call as to which firm to trust, venture debt can be your top key to a successful and sustainable business.
Murray Priestley is has 25 years of commercial and asset management experience having served in board, CEO and senior executive positions with a number of global public and private companies. Murray’s experience covers IT outsourcing, private equity and asset management.
About the Author
“Murray Priestley has 25 years of commercial and asset management experience having served in board, CEO and senior executive positions with a number of global public and private companies.”