Venture Debt Refinancing
Renovating Your Venture Debt Structure
Increased competition among lenders in the corporate debt financing market is leading many companies to evaluate refinancing options. More advantageous terms can extend amortization schedules, free up cash flow, or even increase their leverage to build out operations and pursue acquisitions. Unlike equity, debt can often times be refinanced to suit changing corporate objectives and dynamic market conditions. And because debt terms negotiated even one to two years ago can be substantially different from the current environment, refinancing allows companies to “refresh” their debt facilities to current market terms and conditions. However, negotiating a corporate debt facility aligned with one’s business objectives and current market terms is often a moving target. Early-stage businesses can change direction rapidly as can the terms for the best negotiated debt deals.
Therefore, it is sound business practice to annually review a firm’s debt structure to determine: (1) if the facility maps to the company’s current business model and (2) if the terms and conditions would compare favorably to optimum terms and conditions in the current market. Of course, (1) must be examined in light of specific corporate goals in mind. As for (2), corporate lenders specializing in targeting VC-backed firms have recently raised a significant amount of new capital and, in an effort to put these funds to use, have created a much more competitive venture debt marketplace. Longer terms and cheaper rates are making this market more favorable for borrowers. Thus, it can be advantageous for early-stage companies to re-evaluate their debt facilities in light of the current market.