A loan that is repaid in regular payments over a set period of time.
This is the type of loan most commonly referred to as "venture debt." In this context, venture debt is a form of senior term loan structured specifically for technology companies that would not qualify for a traditional term loan.
For technology companies, the term is usually one to five years.
A frequently used structure allows the borrower to receive the loan proceeds in stages during a 6-12 month interest-only period, and repay the loan over 24-30 equal monthly payments thereafter.
Since most borrowers do not have sufficient collateral or cash flow to qualify for a traditional term loan, the borrower must usually be VC-backed. The lender is basically relying on the VC to continue funding the borrower through the term of the loan.
Pros:
Medium-term source of capital that does not have to be renewed each year.
Flexible loan structure which can be customized to meet a borrower's needs.
With some non-bank lenders, borrower does not have to be VC-backed.
Cons:
Lender generally requires a lien against the borrower's assets, including intellectual property (IP) in some cases.
Since all or most of the loan is borrowed upfront, the average loan balance upon which interest is charged can be higher than a line of credit.
Interest rate is higher than a line of credit.
Lender requires warrants.
Typical borrower:
Early-stage, expansion-stage (growth-stage), or late-stage company.
If lender is a tech bank, borrower must be VC-backed.
With some non-bank lenders, borrower does not have to be VC-backed.
Typical lender:
Tech banks offer the lowest interest rates but, due to bank regulatory requirements, they tend to loan smaller amounts and require financial covenants and other terms. In addition, tech banks have a strong preference for VC-backed companies. Tech banks also require the borrower to move its banking relationship to them (e.g. checking account, cash management accounts, wire transfers, letters of credit).
Non-bank lenders require higher interest rates and more warrants than tech banks, but offer larger loan amounts and more flexible terms.
