Venture debt is a form of financing that complements equity and that tech founders and CEOs should consider as part of their overall capitalization strategy. It typically takes the form of a term loan or line of credit that companies can use to proactively fuel growth. In this post, we’ll look at the steps involved in securing venture debt financing.
The venture debt process
Securing venture debt should be a quick and straightforward process. Often, it can be completed in just a matter of weeks. The typical process looks like this:
- Investment screening. The process usually begins with an introductory call between the borrower and the lender. If there’s a potential fit, the company will be asked to provide financial information so that the lender can conduct a preliminary review and pre-diligence on any items of note.
- Term sheet. In step two, it’s time to sign a term sheet. Term sheets should clearly outline all material terms of the transaction so that there’s no confusion later on in the process. Asking the lender for a term sheet early in the process will also provide you with a better sense of the terms of the financing and help you quickly determine if the offer is right for you before you invest significant time in due diligence.
- Diligence and investment approval. Next, the lender’s diligence team will examine the borrower’s business, financial, operational, and legal situation in detail to determine the borrower’s creditworthiness. Upon completion, the file will be submitted to the lender’s credit committee for review and approval.
- Legal and funding. Following approval of the loan, the lender will provide its legal and funding documentation. Legal documentation, and the associated legal expenses, can vary widely between lenders. As a borrower, you should confirm expected legal costs in advance and look for streamlined legal and funding documentation to drive speed and cost efficiencies. Once any legal issues that may have been identified during diligence have been addressed, the funds should be ready for release.
What comes next?
After securing venture debt financing, borrowers should be prepared to remit monthly reporting to facilitate loan monitoring. A good lender will proactively engage you as needed, provide detailed unit metrics and operational analysis, and leverage its network to help support and accelerate your company’s growth.
Finally, at the end of the term, the borrower repays the loan in full via a refinancing, capital raise, or other liquidity event. In some instances, companies will re-engage with their venture debt lender multiple times, initiating new facilities as their capital requirements evolve and grow.
To learn more about venture debt, check out our full guide.