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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 set at ~80% of eligible receivables plus ~50% of eligible inventory (the traditional collateral base); certain specialty lenders can include other 'assets' such as purchase orders in the borrowing base

Security and Ranking
  • Line of credit

  • Senior at the company or specific assets

Pricing Commentary
  • Lowest cost form of debt; availability determined by relatively liquid assets 

Main Underwriting Factor
  • 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
  • Line of credit; sometimes a series of term loans

  • Senior at the company

Pricing Commentary
  • More costly than traditional asset-based revolver

  • Typically includes warrant coverage

Main Underwriting Factors
  • Customer retention rates, acquisition costs, and lifetime values

  • 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
  • Term loan / note

  • First or 2nd lien (varies from all assets to specific assets, such as equipment or IP)

Pricing Commentary
  • Considerable variance, depending on company stage, growth dynamics, VC backers and path to profitability

Main Underwriting Factors
  • Asset collateral, financial profile, equity backing

  • Cash flow / profitability not required but improves pricing

 

Equipment Loans & Leases

Loan collateralized by specific equipment (or in the case of a lease, assets are purchased by the lessor and rented to the lessee for a fixed monthly amount); over the near-term, leases can be a more cash efficient method of financing equipment vs. a secured equipment term loan

Security and Ranking
  • Senior at specific assets being financed 

Pricing Commentary
  • Priced like venture debt if pre-profit / venture stage company

  • Inexpensive if business is profitable

Main Underwriting Factors
  • Asset resale value

  • Venture capital partners

 

Venture Debt

Lacking a universally-accepted definition, venture debt is a form of term debt typically utilized by early-stage, venture companies (<$10m revenue) with one or more institutional equity backers. Commonly used to extend cash runway or provide "insurance" against a slip in forecasted growth, early stage venture debt works best in conjunction with or shortly after a meaningful equity raise.

Security and Ranking
  • Term loan / note

  • First lien (carveout for IP possible)

  • Maturities range from 3 - 5 years

Pricing Commentary
  • 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
  • Equity backers and liquidity on balance sheet

  • Company fundamentals tend to be secondary criteria

 

Bullet Term Debt

Non-amortizing term debt; generally reserved for later stage companies that could be profitable under a lower growth expenditure profile

Security and Ranking
  • Term loan / note

  • First lien (carveout for IP possible)

  • Maturities range from 5 to 7 years

Pricing Commentary
  • Theoretically more expensive than an amortizing term loan 

  • BUT, given typical company scale and the impact amortization has on the time value of money, cost can be comparable to venture debt

Main Underwriting Factors
  • Enterprise value

  • Path to profitability

 

Mezzanine

Term debt that sits between equity and senior debt; 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
  • Term loan / note

  • Second lien (carveout for IP possible) or unsecured

  • Maturity greater than any senior debt and can range from 3 to 7 years

Pricing Commentary
  • Pricing varies widely with overall cost substantially higher than first lien term loans and revolvers

Main Underwriting Factors
  • Enterprise value

  • Path to profitability

 

Royalty Loans (Revenue-Based Financing)

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
  • Loan or note

  • First lien or second lien (carveout for IP possible)

  • Maturities as long as 10 years

Pricing Commentary
  • Cheaper than equity but more costly than traditional term debt

  • 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
  • Nature and retention metrics of recurring revenue streams

  • Enterprise value

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