Debts are usually a scary thing. Some debts, however, are beneficial. These favourable debts are utilised to fund a startup’s early years. A venture debt, also known as venture lending, is a sort of debt financing received by early-stage enterprises such as startups to raise operating capital or short-term finance. Unlike other types of debt financing, venture debt does not necessitate collateral.

Startups are relying heavily on venture debt financing these days. Despite the global economic lockdown caused by the COVID-19 epidemic, venture debt investment grew dramatically in the first half of 2021, according to data provided by Venture Intelligence (an Indian unicorn).More than $170 million in venture debt transactions have been completed, compared to $55 million in the first half of 2020 and $64 million in the second half of 2020.


What is venture debt fund?

There are two common ways for a company to get capital: equity funding and debt financing. A third option might be a combination of stock and debt financing.


Various modes of rising share capital:



Equity capital is the primary source of funding for a company, and it is obtained through venture finance, which is a subset of private equity. It is raised by the startup through investors who see great potential in the company’s growth in exchange for common or preferred stock in the company.

Along with equity capital, investors contribute to debt financing, which serves as an extra source of working capital for the firm. As a result, a business will typically raise venture debt in addition to equity money. Both are raised during the startup’s early stages.

Unlike stock capital, debt financing functions in the same way as loans do. As a result, the investor anticipates that the sum will be repaid with interest in the future.The distinction between the two is that equity money is still the primary source of funding for a company, whilst venture debt funds are used to get working cash.

The hybrid funding strategy is thought to be more appropriate for raising finances. However, during the COVID-19 pandemic, where investors have become hesitant to raise equity money, loan finance has been more desired.


What is debt financing?


Debt financing is a means of raising funds to run a business and cover operational costs during the early stages of a startup. It is as early as the stage at which a startup’s idea is born. Depending on the requirements and circumstances, the financing might be either short-term or long-term. Short-term debt financing can be used to support the startup’s day-to-day operations, whilst long-term debt financing can be used to purchase assets such as machinery and equipment.

However, the investors are at risk in both circumstances. The risk is higher in equity capital since investors may not receive anything if the company goes bankrupt. However, investors still prefer to raise equity capital since it allows them to be involved in the company’s management and so preserve their influence.

Thus, venture capitalists and other venture debt funds provide funding to raise venture debt during the startup’s early and growing stages. Investors may be returned for this type of investment because the amount is usually not large, and they may charge pre-determined interest on it.


How to secure venture debt funds for start-ups? 



To obtain venture debt funding, first attempt to obtain venture capital from an institution or individual. If you are able to get venture funding, the same place may also be able to provide you with venture debt. A comprehensive business strategy is required to obtain loan financing.


What to include in a solid business plan executive summary contain?


To get started, you’ll need a business plan that includes sections on business description, product and market analysis, prospective market competitors and their analysis, sales and marketing strategy, ownership and management plan, operating plan, financial plan, and executive summary.


Business description 

The part on the business description should come first in the plan. It must include information about your idea and how it evolved into a business, as well as what the pain point of the market you are targeting is and how likely you are to be able to address it. You should not include everything in an overview because it will be included in the executive summary.

However, you can provide an overview of the industry, what the current market trends are, where your product will stand in relation to the current market trends, significant competitors, and expected sales.


Product and market analysis 

The product should be thoroughly defined in the second section, along with how it might respond in the market/industry you are targeting. This should reflect your thorough awareness of the market in which you intend to sell your product, therefore you must be certain of your major goals as well as market response estimations.


Competition analysis

This section is vital for funding purposes since it includes a thorough research of your possible competitors and assists you in presenting a standard image of yourself to the investor. Because you may face both direct and indirect rivalry in the market, you should write about every possible scenario. It will determine your market leverage over your competition. Make a point of analysing the weaknesses and merits of your product as well as those of your competitors, as this will be used to persuade possible funding sources.


Sales and marketing strategy 

This area should include the sales and marketing strategy you want to use for your product, pricing tabs, and how you intend to advertise/promote your product. You must have come up with a unique technique to offer your goods (unique selling proposition), therefore write it down here. Include all of the advantages that your product has that will persuade buyers to buy it.


Ownership and management plan  

The management team is critical in obtaining investors for various sorts of investment in every startup. As a result, this section is essential for any investor considering investing in your firm. Mention your internal and external management teams, their resources, and the overall availability of human resources. Because investors base their choice on how effectively your management team performs, make sure you mention their qualifications and how they will benefit the startup’s operations.

As a result, this part should explain your ownership structure (your company’s legal structure), internal and external management team structure, and human resources. There are numerous proposals for what this section should include. One solution is to form an advisory board to serve as a management resource.


Operational cost and financing plan

This is the most critical section for any type of funding. This section is split into two parts: the running costs plan and the financing plan. The operating cost describes how your firm will operate, including information about your employees, assets (if any), how your product is manufactured, how many people you will need if sales expand, and so on. It must include every area of your company’s day-to-day operations in order for the investor to gain a deeper understanding of it.

In addition, the financing strategy should include three items: your existing financing, your anticipated funding needs, and your forecasted income. Your project income will provide the investor a sense of your financing needs, therefore include all of these details by adding your income statement, balance sheet, and cash flow statement. These are the three most significant documents.


Executive summary  

An executive summary is a summary of the entire business plan in which the major aspects of the business plan are highlighted with keywords. Furthermore, the appendix can provide any additional information about the company.


About the underwriting process 

The consideration for venture debt includes interest payments, fees, and warrants. There are venture debt lenders who are already prepared to finance venture loans after a rigorous underwriting process. Underwriting is performed by an individual or organisation seeking to estimate the risk of an investment, loan, or borrowing.

Underwriting is the process of assessing the risks connected with a certain loan. Underwriters are responsible for evaluating each loan, determining the collateral security available (if any), and determining whether or not the borrower will be able to repay in the case of default.

As a result, it is analogous to a screening procedure that allows investors to make an informed decision.


Source of debt financing 

This can be divided into two categories: private and public. Individual lenders who are willing to provide debt financing in exchange for a personal guarantee are examples of private sources. Public venture debt finance, on the other hand, can be obtained through bank loans or bonds. This is referred to as financial leverage. Microloans, business loans, credit cards, peer-to-peer loans (personal loans), and trade credits are examples of other sorts of loans. Because venture debt funding is an alternative to traditional bank finance, it can be provided via a variety of debt funds established by various venture capitalist institutions/firms/individuals.


Lender  repayment methods

The lender must determine if the firm will be able to secure equity rounds in the near future to repay the venture debt. This is due to the fact that debt can also be repaid using a warrant, which allows the debt to be converted to equity at a later date. However, the equity invested in this transaction is less than that earned in a venture capital investment.


Taxes on debt interest costs 

The lender must determine if the firm will be able to secure equity rounds in the near future to repay the venture debt. This is due to the fact that debt can also be repaid using a warrant, which allows the debt to be converted to equity at a later date. However, the equity invested in this transaction is less than that earned in a venture capital ( vc ) investment.


Advantages and disadvantages of venture debt 

The first impression of venture loan funding is that it is easy to get because no collateral property is required. That, however, should be viewed as a disadvantage. It is because, in the absence of collateral, it may not be a more secure method of borrowing. Because this is similar to borrowing money via a loan, the lender may request personal guarantees. Personal assets such as your home, car, or any other type of investment can be used as a personal guarantee.

When you have a high-growth firm, you should consider debt financing because you will need continual funding to grow it. You can, however, choose debt finance for short-term objectives if you can readily repay it within a year or two of its maturity. However, companies should be wary of the impact these sources of financing have on their credit rating.


Venture debt financing during COVID-19  

Many funds have been founded for venture debt financing during the COVID-19 epidemic, as there has been an increase in venture debt financing. For example, in India, numerous funds such as Alteria Capital, Trifecta Capital, and Innoven Capital provide this form of funding. To mention a few, these funds have provided venture debt to startups such as Bigbasket, Dunzo, and Curefit. Ankur Capital and Unicorn India Venture plan to form additional capital venture funds to provide loan financing. Venture loan investment began in India 15 years ago, and it has since enriched the ecosystem of Indian businesses that have been unable to raise funds at the early stage. Even startups aim to go through the valley of death stages of a startup, where 90% of them fail. This is where venture loan financing comes in handy.



Debt financing is a faster way to receive money for startups, but it involves a number of factors that must be carefully considered before embarking on this path. The same law applies to investors and individual lenders in the business of providing venture finance funding. Before making a choice, both parties should evaluate the risks involved. Finally, because venture debt financing is derived from the venture equity market, one must closely monitor the same in order to understand the correct moment and the proper manner to obtain debt funding.



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