What Is Venture Debt?
In the past, venture debt was often one of the last sources of financing companies would consider. That’s because venture debt typically comes with higher interest rates and a shorter repayment period than traditional bank financing. But in recent years, this type of financing has gained traction as a strategic tool for companies that want to minimize equity dilution and preserve capital.
Venture debt is a great option for venture-backed companies that need to meet short-term financing needs but don’t want the dilution that comes with equity capital. However, there are a few things you should know before you pursue it.
Venture Debt vs Equity
Venture debt is a loan, which means you're lending money to a company in exchange for interest payments and repayment of the principal. Compared with equity financing, venture debt is safer because it's not a permanent stake in your company (you can get your money back at any time) and it doesn't give any control over how you run your business.
Venture debt usually has no set maturity date; instead, it's repaid when an investor wants to sell their shares or when they've made enough progress to attract new investors (or both). If an investor chooses not to sell their stake in your company when they have the opportunity, then there will be no penalty except interest on what you've borrowed from them until then—and even that might be waived if things go well.