Shortcomings of Venture Debt Financing & Better Options

Shortcomings of Venture Debt Financing & Better Options

Tamar Katz

Many companies turn to venture debt financing to obtain capital for key investments, such as software, to simplify tasks and improve the customer experience. However, it's important to note that there are alternative financing options that may not carry the same level of risk as venture debt financing. 

In this blog, we'll discuss the shortcomings of venture debt financing and explore better options for obtaining the funding your business needs.

The Shortcomings of Venture Debt Financing

Venture debt financing is usually in the form of a loan, with eligibility based on the strength of the investors and founders and the likelihood that the company will grow. Venture debt is often used with other financing methods, such as equity funding, reducing founders' control over managing the company and its growth. 

That said, let’s look at some disadvantages before taking on this kind of debt. 

It Can Hamper Growth

Venture debt can deter growth. You’ll need to sign a contract that will tie you to a repayment schedule. Preserving cash flow will be difficult as you’ll have hefty outflow commitments to consider. 

Repayment Is Not Flexible

Venture capitalists who provide financing for startups go into the scenario knowing that half of them will fail. The other half will make enough profit to help investors cover their losses. The repayment terms of venture debt financing are quite rigid to protect investors from further losses on businesses failing to perform as expected.

Potential Negative Consequences of Venture Debt Financing  ​

You’ll default on the loan if payments are not made per the strict schedule accompanying venture debt financing. This will make the amount owed due in full. If you cannot afford to pay the total amount you owe, the investors can take you to court and push you to liquidate your assets.

Alternatives to Venture Debt Financing

Luckily, there are several alternatives to venture debt financing to obtain the funding needed for necessities such as your software and infrastructure contracts. Here is a look at some of your options.

Business Loan

While it's true that obtaining a traditional business loan is more difficult, it isn't impossible. You can succeed in securing financing through online loans. 

However, you might not qualify for a large loan or get a reasonable interest rate on borrowed money. Check with the Small Business Administration to see what they can do for you regarding microloans. 

While obtaining a loan protects you from the dilution of equity that comes from equity financing, there are some risks, including the threat to personal assets. The last thing you want when trying to help your company succeed is a phone call from a lender threatening to call in your loan.

Line of Credit

This option can put money on the table on an as-needed basis. Interest accrues on the credit line portion accessed from month to month, and you can access funds through several draws throughout the month. 

However, while a line of credit can be convenient for you in the short run, it is important to understand that this option has some shortcomings, including the time involved in applying, the expense of high interest rates, and low spending limits. If you can pay it back promptly, it’s a great option to consider. 

Equity Financing

The benefit of equity financing is that it isn't a loan, and the amount of money raised through the sale of shares does not need to be paid back. However, trading partial ownership of your company to investors can have unintended consequences, as it dilutes your own and can reduce the amount of control you have over your company. 

Additionally, you’ll need to do additional work to determine the appropriate type of stock to sell, the pricing, and who to sell the shares to. You might also need to reduce share prices to attract investors. 

Debt Financing

While equity financing involves receiving funding in exchange for stock or other ownership in the business, debt financing involves borrowing money under an agreement to pay it back with interest. While many companies receive the funding they need through a combination of equity and debt financing, the latter's benefit is that those providing the funds do not have any ownership of the company and cannot control how it is managed. Additionally, the payments made following the debt financing agreement are tax-deductible and easily forecasted, as repayments are a set amount. 

A business line of credit, credit cards, personal loans from family members or friends, SBA loans, and traditional business loans are all types of debt financing. Unfortunately, many companies are ineligible for debt financing because they haven't been in business long enough to produce the financials needed to show creditworthiness.

Software Financing From Gynger

Purchasing software and infrastructure is one of the largest expenditures at growing companies. Because the cost of the tools needed is so great they resort to higher costs in order to obtain financing through the software vendor. This can negatively impact cash flow for a long time to come. .

While vendor financing  allows you to obtain software without paying  out a large lump sum for an annual subscription, this payment plan can cause you to miss out on the incentives many software vendors offer to those who pay for their subscription upfront.

Gynger provides loans for companies on an easy-to-use platform. Here is how it works:

  • Gynger pays your software vendor the full contract upfront. You can often negotiate a reduced price for the upfront payment, resulting in less money you will have to pay back in the future.
  • You repay Gynger for the amount they fronted to your software vendor. However, unlike most types of financing, repayment to Gynger features flexible terms. You pick the repayment model that works for you.

Using Gynger is a win-win. Your SaaS provider receives the money for their product upfront while you receive the software you need without worrying about a large upfront payment

Through our easy repayment terms, you can pay multiple vendors upfront and spread all of those payments over an extended period, allowing you to preserve cash flow, reduce cash burn, and optimize your runway even as a company with limited initial capital.

To learn more about how Gynger's software financing works, contact us today.

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