Frequently Asked Questions
QWhat are differences between venture debt and venture leasing and why are they important?
AVenture lending is a line of credit put in place to fund working capital, TI’s, and general corporate purposes. This line of credit is secured by an incoming accounts receivable stream, a term loan security, or a combination of both.
Venture leasing, or sometimes referred to as asset-backed financing, is a line of credit put in place to finance companies capital equipment expenditures, software purchases and various other types of hard asset needs. The equipment is secured by a UCC lien and acts as the lenders collateral in the deal.
Venture lending and venture leasing are alternatives to venture capital. Venture debt and venture leasing allow companies to establish lines of credit and borrow money. Typically, companies who use these types of facilities are not yet creditworthy from a traditional banking standpoint. Almost all of these companies are classified as early stage startup companies who will in turn use the borrowed credit line to leverage the equity they have raised. This allows the companies equity to last longer and be used more productively. Both debt and leasing are considerably cheaper than equity from a shareholder dilution perspective and by financing certain expenditures, companies can save their expensive equity dollars for other uses.
QWhen is the best time to put a debt facility in place?
AThe best time to put a debt facility in place is at the moment a company receives a large sum of cash, most likely at the closing of a recent round of equity financing. By constructing a well designed budget and a achievable model for growth, a company can then determine how much capital they will require immediately and throughout the future.
QWhat are the “need to know” issues concerning financial covenants?
ACovenants are restrictions under which a company must operate in order to borrow money or keep an outstanding loan balance. Requirements of covenants may include minimum cash levels, achieving certain financial milestones, or raising an additional equity round by a specified date. Covenants generally specify that a company must operate at a certain level of efficacy in order to remain in compliance with the established covenants. Consequences for violating a covenant may mean defaulting on a loan or loans. Default in one’s loan could have one of two results: 1) restructuring of the deal and establishing new covenants, or 2) calling the loan, making the balance outstanding due immediately.
QWhat are the “need to know” issues concerning blanket liens and pledges of intellectual property (IP)?
AA blanket lien is a safety net used as collateral when financing loans with significant soft costs. Examples of these types of loans could include a loan for growth capital, working capital, or for any corporate purposes. These types of financing are secured by blanket liens, which is an all-asset lien. In some cases you will find that a blanket lien will include a lien on intellectual property (IP).
Blanket liens are typically found in a liquidation of a company. When a lender secures a broader blanket lien this will ensure that lender is paid in full before any unsecured creditors would receive any proceeds from the liquidation. The blanket lien acts as the collateral in the financing by tying up all the assets and ensuring first right of full reimbursement.
The blanket lien and the lien on IP provide significantly less flexibility for the company and can be exercised immediately upon defaulting on the loan or encountering a minor short fallin the business model. For this reason, companies often find themselves being more willing to pay higher rates rather then exposing their IP and other core assets for the less flexible lower terms.
QDoes a lenders funding capacity make any difference when choosing a debt facility?
AIt is important to know what a Venture lenders or lessors funding capacity is when you are beginning to select a debt partner. Knowing a debt partners funding capacity will give a borrower the re-assurance that the debt partner will be able to support the company overtime as it continues to develop.