Private debt capital can be a highly advantageous alternative financing option for growth stage companies. Private debt investors offer a variety of financing options across multiple stages of a company’s development from early stage to post-IPO. These investments can range from longer term senior secured loans to short term lines of credit, and are typically milestone-driven financings to help a company accomplish goals such as accelerating R&D, purchasing equipment or expanding into new markets. Debt financings can also be structured for more general uses or to strengthen a company’s balance sheet.
There are many investors with an exclusive focus or investment arm dedicated to debt investments in growth stage companies. Some of the leading firms including Hercules Technology Growth Capital, TriplePoint Capital, Wellington Financial and BIA Digital Partners. Similar to their equity investor counterparts, these and other private debt investors tend to focus on high growth sectors such as technology, energy, business services, life sciences and healthcare.
Private debt investments can be structured to meet a company’s particular needs and can offer key benefits over an equity or convertible debt investment. Typically, a growth debt investment will take the form of a senior loan with a very small fraction of equity, and expected returns will be in the 10% to 15% range. While this is more expensive than traditional debt options, it allows entrepreneurs to accelerate growth while minimizing dilution to current owners. You can also expect private debt investors to be less active in the operations of the business post-investment. While a growth equity investor is more likely to take a board seat and help management execute strategic initiatives, a lender may take on more of a customer support role offering services such as loan administration and legal services related to the financing, but staying out of the day-to-day operations of the business. This type of relationship may be more advantageous for companies looking exclusively for financial resources without the strategic implications of bringing on an equity partner.
An additional potential benefit of working with private debt investors is the long-term nature of the relationship. While any specific investment or loan may have a limited term associated with it, debt investors make loans of varying maturities and tend to be active across the different stages of a company’s development.
There are some common aspects companies should look out for when contemplating raising debt in lieu of equity. For example, a company should not use debt as a financing option of last resort or when its coffers are already running low. If a company is in a weak position when it raises debt financing, the terms of the investment could be extremely disadvantageous, including both the interest rate paid and more technical default clauses. If leverage and interest levels as compared to a company’s income are extremely high, that may even discourage additional investors down the road should the company wish to raise additional financing.
Private debt can have a lot of benefits over more traditional equity and debt options. It allows a company to expand its capital base so it can execute on a variety of initiatives while minimizing the effects of dilution. However, any debt investment should not be taken without understanding the terms and impact on the long term financial health of the company and ability to court additional investors in the future.