Venture Debt: what is it and how does it work?

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Venture Debt is a type of financing in the form of debt offered by banks and investment funds that is specifically designed for high-growth companies in their initial stages. Many startups that have venture capital (Venture Capital) as investors complement their financing needs with Venture Debt.

In this article we explain what Venture Debt consists of and what its advantages are for financing startups.

What is Venture Debt?

Venture Debt is a startup funding formula for the early phases of the project, normally is used to finance:

  • Product development
  • geographic expansion
  • Marketing and sales

Unlike traditional loans, Venture Debt loans are typically more flexible and often include debt-to-equity options.

In addition, Venture Debt funders often require the company to have a strong capital base with support from a venture capital fund (Venture Capital) and a proven track record of growth before providing financing.

Venture debt can be an attractive option for companies that need additional capital to finance their growth, but do not want to dilute their ownership by selling more shares to investors. It can also be useful for companies that are close to a major financing round and need additional capital to stay afloat until the round closes.

As regards requesting debt, the banking sector is not prepared to offer startup financing solutions; partly due to ignorance of the business model (which makes it difficult for them to analyze the operation) and partly due to the rigidity of the procedures. Without having the guarantees that they usually demand.

These are the reasons why they are emerging alternative financing mechanisms, with the capacity to provide solutions to emerging companies. Among them stands out the Venture Debt.

How does Venture Debt work in Spain?

As we have said, in simple terms, it is about a long-term loan granted by investors, usually investment funds (Venture Debts funds), although it can also be carried out by commercial banks and public bodies.

In Spain it is not a product offered by commercial banks, so we only have as an alternative investment funds or public entities such as the European Investment Bank (EIB), which has a Venture Debt program in Spain to support the growth of innovative companies.

Most loans are to finance growth, these loans usually have to be repaid within three to four years, but often start with a 6 to 12 month interest-only (I/O) period. . 

During the I/O period, the company pays the accrued interest, but not the principal. When the I/O period is complete, the company begins to pay the principal balance of the loan. The length of the I/O period and the terms under which the loan can be withdrawn are key points in the negotiation process.

Debt investors are well aware that dilution is a powerful incentive, as the core value proposition of risky debt is reduce dilution for the founders and other partners; That is why the risk assessment is very similar to the evaluation that venture capital does.

What are the advantages of a Venture Debt?

Between the advantages stand out:

additional financing:

Venture debt can provide emerging companies or startups with additional financing to fuel their growth, which can be crucial in the early stages of the company.


These types of loans usually have more flexible terms than traditional loans, allowing companies to tailor financing to their specific needs. For example, the venture debt may have longer repayment terms than traditional bank loans.

minor dilution:

It is often an alternative to financing by issuing shares, which means that companies can raise additional funding without diluting ownership of existing shareholders.

Acceleration of the financing round:

In addition, it can help companies to accelerate a larger funding round, providing additional capital to keep the company running while the round closes.

In general, the venture debt can be a Useful tool for start-ups that need additional financing to fuel their growth, but don't want to dilute ownership of existing shareholders or do not want to sell more shares.

However, Venture Debt is only one of the startup financing alternatives. Depending on the situation, initial conditions and needs, this route or other mechanisms can be chosen. Can get in touch with Alter Finance to find the financing formula you need.

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