Venture Debt - A Primer
The Fed has decided to raise interest rates steeply. One rate hike has already been announced this year. It is likely that there are many more rate hikes to follow until the year 2020. The cost of capital is likely to go up. In a high-interest rate scenario, investors typically prefer to invest in debt itself. This is because the returns from equity do not seem very attractive if the returns from debt increase significantly. In a high-interest rate scenario, the risk appetite of investor is reduced. Hence debt funding becomes more prevalent during such times. It seems like high-interest rates will be the norm for the next few years. Therefore, high-risk investments like venture capital may face a shortage of funds. It is for this reason that the popularity of venture debt is increasing. In this article, we will have a closer look at venture debt.
What Is Venture Debt?
Venture debt means the wide variety of debt-based financing options that can be used by companies that have already been backed by venture capital firms. Venture debt can be raised from the same firms that provide venture equity funding. However, such companies make debt investments only in very rare cases. Usually venture debt is raised from banks and other consortiums which have an expertise in making such investments. However, it needs to be understood that like any other debt investment, venture debt is also a loan. Hence, it needs to be paid back
Benefits of Using Venture Debt Funding
The benefits of using venture debt are as follows:
To sum it up, venture debt is an important tool. This tool is particularly helpful in the era of high-interest rates. Also, if used correctly, it helps firms keep their business running by providing them adequate cash flow at the right time.
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