Kauffman Fellows article: Venture Debt: A Capital Idea for Startups

Great article by Patrick Gordan.

Access to capital is the paramount concern of emerging growth companies. First and foremost, a startup must secure the proper amount of capital; too little and it may fail to thrive, too much and it may become bloated and unable to grow efficiently. Cost is critical as well—many an entrepreneur and investor have built successful companies only to find that the fruits of their labor have been diluted significantly along the way.

These concerns have led to demand for supplemental forms of financing that provide startups with the capital they need, at a cost that makes sense. To meet this need, venture debt has emerged as an integral part of the entrepreneur’s toolkit. Venture debt is a form of debt financing for venture equity-backed companies that lack the assets or cash flow for traditional debt financing, or that want greater flexibility. A complement to equity financing, venture debt is generally structured as a three-year term loan (or series of loans), with warrants for company stock. Typically, venture debt is senior debt that is secured by a company’s assets or by specific equipment. Overall, venture debt is a form of “risk capital” that is less costly than equity when structured appropriately.

Link to full article: http://www.kauffmanfellows.org/journal_posts/venture-debt-a-capital-idea-for-startups/