Lower Cost / Less Flexible
Asset-Oriented
Greater Flexibility / Higher Cost
Enterprise Value-Oriented
The Growth Debt and Venture Debt Ecosystem
Revolvers
Revolving line of credit wherein availability is limited to the lesser of total facility size and a borrowing base, often tied to eligible receivables, plus of eligible inventory (the traditional collateral base); certain specialty lenders can include other 'assets' such as future A/R and purchase orders in the borrowing base
Security and Ranking
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Line of credit
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Senior at the company or specific assets
Pricing Commentary
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Lowest cost form of debt; availability determined by relatively liquid assets
Main Underwriting Factor
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Strength of assets (such as customer diversity and payment history)
MRR Lines
Revolving line of credit (or series of term loans), wherein availability is limited to the lesser of total facility size and a borrowing base set at a multiple of recurring revenue ("MRR"); most commonly provided by banks for subscription software companies
Security and Ranking
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Line of credit; sometimes a series of term loans
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Senior at the company
Pricing Commentary
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More costly than traditional asset-based revolver
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May include warrant coverage
Main Underwriting Factors
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Customer retention rates, acquisition costs, and lifetime values
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Financial profile of borrower and equity backing
Senior Secured Term Debt
Loan or note providing a specific amount of capital to be repaid under a set repayment schedule (from equal monthly payments to non-amortizing, bullet maturities); equipment loans and venture debt are subsects of senior secured term debt
Security and Ranking
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Term loan / note
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First or 2nd lien (varies from all assets to specific assets, such as equipment or IP)
Pricing Commentary
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Considerable variance, depending on company stage, growth dynamics, VC backers and path to profitability
Main Underwriting Factors
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Asset collateral, financial profile, equity backing
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Cash flow / profitability not required but improves pricing
Asset Loans (Equipment, IP, Future A/R)
Loan collateralized by specific assets (or in the case of a lease, assets are purchased by the lessor and rented to the lessee for a fixed monthly amount); can include esoteric assets such as expected A/R that remain off balance sheet, loan portfolios for fintech companies, or loans tied to intellectual property or other esoteric assets
Security and Ranking
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Senior at specific assets being financed
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Certain lenders specialize in 2nd lien on specific asset pools
Pricing Commentary
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Priced like venture debt if pre-profit / venture stage company
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Inexpensive if business is profitable
Main Underwriting Factors
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Asset performance history and/or liquidation value
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Actuarial value of expected collections
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Breadth / depth of IP value and related infringement value
Venture Debt
Lacking a universally-accepted definition, venture debt is a form of term debt typically utilized by high growth venture companies that may or may not have institutional equity backers. Commonly used to extend cash runway or provide "insurance" against a slip in forecasted growth, venture debt is increasingly utilized as true growth capital in lieu of or in between equity rounds.
Security and Ranking
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Term loan / note
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First lien (carveout for IP possible)
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Maturities range from 3 - 5 years
Pricing Commentary
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Cost of capital varies widely with banks offering interest rates in the mid-single digits plus warrants; specialty funds seek all-in returns of 2-3x that of banks
Main Underwriting Factors
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Equity backers and liquidity on balance sheet
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Enterprise value / probability of significant exit value
Bullet Loans (Mezzanine)
Generally non-amortizing, patient term debt that sits between equity and 1st lien debt facilities; can either be unsecured or secured by a second lien or a silent second lien; cost, governance, and amortization (if any) vary widely
Security and Ranking
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Term loan / note
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Second lien (carveout for IP possible) or unsecured
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Minimal to no amortization; maturity greater than any senior debt and can range from 3 to 7 years
Pricing Commentary
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Pricing varies widely with overall cost substantially higher than first lien term loans and revolvers
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When factoring time value of money, effective cost can be comparable to amortizing structures
Main Underwriting Factors
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Enterprise value
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Path to profitability
Contract Sale
A cousin of traditional A/R factoring, contract financing involves the unsecured financing or outright sale of future cash flows tied to existing contracts and/or expected renewals.
Security and Ranking
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Typically unsecured but may interfere with senior lenders that have a 1st lien
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Can take the form of a "true sale" of contracts or a merchant cash advance structure
Pricing Commentary
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Structured as a discount to future cash flows
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Rapid underwriting and funding
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All else equal, generally more expensive vs senior secured solutions
Main Underwriting Factors
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Future contracted cash flows
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Renewal rates
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Customer credit quality
Revenue Based Loans
Term loan where repayment is based on a fixed % of future revenue streams; can increase in size with multiple tranches to support growth; once the domain of energy and biotech, several firms are now utilizing this structure in more ‘traditional’ tech sectors
Security and Ranking
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Loan or note
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First lien or second lien (carveout for IP possible)
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Maturities as long as 10 years
Pricing Commentary
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Cheaper than equity but more costly than traditional term debt
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Debt service is set as a % of revenue, the aggregate total sum of which is capped at a multiple of borrowed capital (like a liquidation preference)
Main Underwriting Factors
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Nature and retention metrics of recurring revenue streams
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Enterprise value