Precise and comprehensive concepts of growth debt exist. Equipment finance debt loans and debt leaseback supplied to initial stage enterprises were first referred to as "growth debt" or "debt ventures" in the 1970s. Because they lacked the financial flow to take on conventional loans, these firms could not purchase physical assets, including computer gear or technology lab equipment.
Why Growth Debt?
Non-Dilutive – Growth Debt does not dilute the value of the company's stock. When utilized in conjunction with conventional forms of non-bank financing, debt capital, and private equity, royalties may be a viable substitute for warrants or other capital instruments. Without a value, Growth Debt is an intriguing option for firms concerned about share loss and protracted valuing disputes. Growth Debt makes the value discussion moot and inapplicable. There is no need for company owners to escape or buy their company since Growth Debt is identity; thus, there is no need for them to sell their company. We have matched our objectives with those of company owners to boost top-line revenue as much as possible.
Benefits for Growth Funding in Technology
- Boosting Growth:
Boosting expansion by avoiding or reducing stock dilution is a crucial goal of growth capital.
- Extend financial runway:
Allows a firm to accomplish critical milestones and a better value in the next equity round by bridging equity funding rounds. Increasing the cash runway till profitability, which allows them to eventually raise more equity or reach a point when cheaper capital is available, might also be an option.
- Take steps to get yourself ready:
In the case of an unfunded company, obtaining venture finance may be a good option. It is possible to speed development and enhance operations by partnering with a skilled debt investor. Venture capitalists are more likely to invest in a company that has taken these steps, which should lead to a higher value.
- Bank debt is more difficult to obtain:
It's unnecessary to have a reliable income or substantial assets to offer as security. If your company needs expansion financing but isn't developing quickly enough to draw an investment firm or isn't happy with the conditions given, this is an excellent option. If you don't want to acquire a controlling stake or your company isn't big enough or successful enough to engage a private equity firm, a private equity firm may be a viable option.
- Terms that may be negotiated:
Loan amounts, repayment terms, amortization schedules, and personal guarantees are less restricted than bank loans.
- No Loss of Control:
In most cases, lenders will not demand a seat on the board or any direct engagement in the company's governance or operations.
- Process in a jiffy:
Due diligence may be completed in as little as 30 days, compared to 3-6 months for equity.
The Disadvantages of Growth Debt in Tech:
The repayment of debts is an absolute need. The borrower is responsible for making all agreed-upon payments, including the principal and interest. Taking a personal interest in the result. It is feasible for a lender to require equity participation from a borrower depending on the loan they are taking out. Establishing a price for capital is proving to be complicated. Because of variables like amortization, equity participation, and other considerations, estimating the cost of capital may be difficult.
Types of Growth Debt
In terms of its technical classification, venture capital (VC) is a kind of private equity. Private equity investors favour solid businesses, while venture capital investors often participate during the beginning stage.
In most cases, venture money is provided to startup firms with tremendous growth prospects. Because of the potential for substantial returns, venture capital investors are attracted to this form of investment, which is not readily acquired and risky.
Startups and small businesses in the early phases of development may benefit significantly from venture capital financing. Like private equity investors, VC investors may contribute to the process by sharing their experience and skills.
Using this method, you may reduce your risk and avoid making many of the common errors that new businesses make in the early stages of their operations. With a high failure rate for new enterprises still in existence, having experienced staff on hand might be beneficial. As well as being well-connected, venture capital investors can assist you in discovering new prospects.
A limited number of private equity firms may get growth loan financing in the technology industry. A small amount of loans is accessible to entrepreneurs in a few select parts of the nation via non-bank businesses, although these sources are very limited in their availability. In addition, in the technology industry, adjustable growth debt and term loans are debt instruments offered by equity investments and are viewed by founders to be a variant on equity investments.