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Understanding the True Cost of Venture Debt
The headline rate is not the actual cost of borrowing. Founders need to take into consideration processing fees, legal costs, prepayment costs, security and the value of warrants.
|
Cost Component |
What Founders Should Check |
|
Interest |
Commonly around 12%–18% annually; confirm whether the rate is fixed or floating |
|
Processing fee |
Upfront charge calculated as a percentage of the facility |
|
Warrants |
Confirm whether coverage is based on the loan amount or the company's fully diluted shareholding |
|
Security and guarantees |
Understand the charge over company assets and whether personal guarantees are required |
|
Covenants |
Review reporting requirements, minimum cash balances and restrictions on additional borrowing |
|
Prepayment |
Check early repayment penalties, lock-in periods and other exit conditions |
Warrant coverage can be either based on the dollar amount of the loan or be based on the company's fully diluted equity. These are alternative calculations. Market-reported ranges are not all equal and should not be used interchangeably, and in a term sheet, founders should define what exactly they are using to report the range.
Ankur Bansal, Co-Founder and Director of BlackSoil Capital, has highlighted the role of warrants in venture debt, saying: "Investors are opting for Venture debt as an asset class because of the low volatility in returns and the equity kicker can outperform enabling the upside can be far greater."
Lender interest rates and other conditions vary and fluctuate with market conditions. Before entering into a facility agreement, founders should look at the entire repayment plan and all expenses involved.
