Capital Advisors Group is a Boston area-based institutional investment advisor that has been helping venture-backed companies invest their cash assets for more than 25 years. Its debt finance consulting division helps early stage companies, both public and private, determine their optimum capital structure, identify appropriate lenders, source term sheets and negotiate debt financing deals
As uncertainty begins to creep steadily into the minds of investors and IPO markets noticeably cool coming into the end of the year, revisiting the debt markets and the options they hold might prove fruitful for companies seeking financing in the medium-term. This paper will review the types of debt financing available to earlier stage companies and when and how such financing might be appropriate.
A Brief History of Debt Financing
Financing projects and growth through debt has long been a staple of modern corporate economics. However, debt for companies which have very little credit history, a relative lack of fungible assets, negative cash flow and little to no revenue (often for 2+ years) in the past presented an untenable risk for many traditional bank lenders. Therefore, early stage companies with a need to develop products, continue R&D or build out operations, primarily sought equity investment, which resulted in a potentially significant dilution to fund their goals.
Debt financing has been around in one form or another for decades. Venture debt was first introduced in the late 1960s for new technology firms that did not qualify for traditional bank financing. These start-up companies not only lacked a proven track record, but also were burning through cash. Historically, the only way such companies could raise capital was through equity financing. Then, a number of equipment leasing companies that were well-prepared to maximize the value of certain types of equipment as collateral, began underwriting equipment leases to these early stage companies. In this emerging form of lending, venture debt was collateral driven and almost never reached the 100% financing level for these cash- strapped firms.
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