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July 9, 2024
10 min read

Venture debt: the guide for companies

All you need to know about venture debt.

Venture debt emerges when startups seek growth without surrendering equity. This risk-oriented financing option has become a valuable complement to venture capital. What should every startup know about venture debt?

Venture debt is a well-known term in the startup world (it is also known as venture lending). First, it was used in the 1970s. Back then, banks like Silicon Valley Bank (SVB) provided venture debt to finance hardware, machines, and office equipment. A lot has happened since then, and venture debt is no longer an option for financing tangible goods. 

This article explores how venture debt works, what kind of eligible criteria there are, and how venture debt and venture capital play together.

re:cap_Venture Debt
In a nutshell: what you need to know about venture debt.

What is venture debt?

Venture debt is a form of debt financing (risk loan) provided to early-stage, high-growth companies. It serves as a complement to equity financing, often used by startups and companies that have already received venture capital funding and wanted to grow further. Therefore, it is also called growth capital.

While equity financing involves selling shares of the company to raise capital, venture debt allows companies to borrow money with the obligation to repay it over time, usually with interest. This financing tool has gained popularity due to its ability to provide capital without significant dilution of ownership. Venture debt loans are usually provided shortly after or during an equity financing round. This venture loan ensures that startups receive debt financing between their equity rounds.

Institutional investors in the form of venture debt funds, banks, or government funds act as venture debt lenders.

Definition and characteristics

Venture debt is a type of loan specifically designed for venture-backed companies. It is typically provided by specialized venture debt funds or banks and is structured to meet the needs of startups and growing companies. Key characteristics of venture debt include:

  1. Non-dilutive financing: venture debt does not require companies to give up ownership stakes. This allows founders and early investors to retain more control over the company.
  2. Subordinated debt: venture debt is often subordinated to other forms of debt, meaning it has lower priority in case of liquidation. This makes it riskier for lenders but also more flexible for borrowers.
  3. Warrants: lenders may receive warrants, which are rights to purchase equity at a later date, as part of the loan agreement. This provides lenders with potential upside if the company performs well.
  4. Short to medium-term: venture debt typically has a repayment period ranging from 12 to 48 months, making it a short to medium-term financing option.

How venture debt works

Venture debt is usually structured as a term loan or a revolving line of credit. The process involves the following steps:

  1. Loan application: companies apply for venture debt, providing financial statements, business plans, and information about existing venture capital investors.
  2. Due diligence: lenders conduct due diligence to assess the company’s financial health, growth prospects, and the credibility of existing investors.
  3. Loan agreement: upon approval, a loan agreement is drafted, detailing the terms and conditions, including the interest rate, repayment schedule, and any warrants.
  4. Funding and repayment: once the agreement is signed, funds are disbursed. The company then makes periodic interest payments and eventually repays the principal amount according to the agreed schedule.

Venture debt is particularly interesting for startups that have made it through the seed phase and need an injection of cash for their further growth. At this stage, they have raised equity, generated revenue, developed a product, and have a product-market fit.

Scaling further growth is very capital-intensive. Since the focus is not on profitability, startups burn money (cash burn) during this phase. Therefore, they continuously need new cash to finance growth measures and to extend their cash runway. However, their cash flow is not sufficient, or even intended for this purpose.

Typically, early-stage companies now have two choices of traditional financing instruments to finance growth.

Which financing instrument is the right one?

The first option is a bank loan. 

However, most startups are hardly eligible for a loan. They usually cannot provide any securities or assets that would be of interest to a traditional financial institution.

After all, the business model of a tech startup is not something banks deal with daily – there is a lack of relevant experience and knowledge about it. Traditional banks work with predictable cash flows, cash balances, and profitable companies.

The second option is equity, meaning venture capital. 

Business angels, later venture capital funds, and family offices are available at the initial stage. Startups, however, do not want to finance themselves in new equity rounds. There are three main reasons for this:

  1. Every equity funding involves a dilution of shares.
  2. Dilution reduces control, because VC investors actively influence the company, are part of the board, and give advice.
  3. VC rounds are time-consuming for founders and tie-up resources.

Venture debt follows venture capital – but does not replace it

If traditional avenues such as banks and venture capital firms fall through the cracks, venture debt can be an alternative form of financing for startups. By providing debt, startups can scale their business model and finance growth.

The startup does not have to give up too many shares too early (with warrants being an exception). It allows the company to reach further milestones and creates the basis for the next VC funding.

Typical growth measures that a startup finances with venture debt are:

  • Purchase of operational equipment such as hardware or machinery
  • Capital for acquisitions (M&A)
  • Increasing revenue (e. g. marketing campaigns)
  • Hiring of new employees 
  • Preliminary costs of a planned initial public offering (IPO)

Usually, venture debt accompanies existing equity financing. It follows venture capital, but it does not replace it. Venture debt and venture capital go hand in hand.

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Venture Debt follows Venture Capital but does not replace it.

Thus, a good time for venture debt financing is directly following or during an equity round. Why?

  • The startup has strong liquidity and is well-funded for the coming months or years. The costs of venture debt can be repaid with the help of equity.
  • Venture debt lenders follow the results of the most recent equity round: They use the startup's valuation in terms of goals, performance, and enterprise value to allocate venture debt.

Who issues venture debt?

In Germany, "Kreditanstalt für Wiederaufbau (KfW)" with its "Venture Tech Growth Financing" acts as investors in venture debt. In Europe, it is the European Investment Bank (EIB).

While it is not required for the EIB to cooperate with a private venture debt fund, KfW finances exclusively in cooperation with private funds. Venture debt investors with a government background tend to work with early-stage companies over a longer period. According to the EIB, five to seven years.

Private vs. government providers 

In the case of venture debt from the private sector (banks and funds), there are now multiple providers (a list is at the end of this article). One of the most active was the Silicon Valley Bank until its dissolution in 2023.

They usually lend debt capital for one to three years. From the lender's point of view, repayment evolves from the revenues a company generates from the previous VC financing round. In addition, the venture capital itself may still be available as an option for repayment. 

Venture debt is a popular method of financing startups, especially in the US, China, and Israel. In 2022, around $45 billion was invested in young companies via venture debt in these three countries. In Europe, the financing volume with venture debt amounted to around $4 billion in 2022.

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The most important aspects about Venture Debt.

How startups can secure venture debt 

There are various requirements and processes for startups when using venture debt, depending on the investor.

Venture debt with a government background

For venture debt from the public sector, there is usually a distinct set of requirements for startups.

The german Kreditanstalt für Wiederaufbau (KfW) has been supporting young and innovative technology companies looking to finance their future growth with its venture debt program since 2019.

Startups must meet the following criteria:

  • Startup must have raised venture capital
  • No banks, insurance companies, or comparable financial institutions have a stake of more than 25% in the company
  • The investment is made exclusively in combination with private venture debt providers, whereby the goal is a risk distribution of 50:50.

The European Investment Bank also has several requirements:

  • That have received at least one round of equity financing from venture capital
  • Where the EIB provides a maximum of 50% of the planned investment
  • Which are strategically crucial to the European Union, e. g. AI, Industry 4.0, or circular economy technologies.

Venture debt financing from private companies

Similar to government players, equity financing is essential to venture debt funds. Usually, a startup must have secured at least one VC financing beforehand.

Other criteria for securing venture debt: 

  • Sustainable business model that has proven to be robust in the market 
  • Stable revenues and corresponding growth 
  • Reliable customer base 
  • A market that offers sufficient growth potential
  • A team that has experience in scaling a startup and taking it to the next stage of growth

Of course, the requirements of venture debt funds are less transparent than government providers. Nevertheless, their offer is for startups that have passed the seed phase and are on the way to Series A or further equity financing.

Typically, startups must submit a detailed description of their investment expenditures and financial planning.

Venture debt firms review the submitted documents in light of their financial viability and economic profitability. In addition to due diligence and personal interviews, social, environmental, and climate aspects also play a role in the decision.

Venture Debt has its price

As with any form of financing, venture debt offers advantages and disadvantages. Startups should evaluate these carefully before making a decision.

The advantages of venture debt

  • Startups gain access to debt capital.
  • Venture debt can ensure that there is less dilution.
  • Venture debt ensures that startups can continue to finance their growth.
  • With the help of venture debt, startups can overcome financial bottlenecks (extend their runway) and use this extra time to reach important milestones and further develop their business.
  • Venture debt can help startups to achieve a better valuation for the next equity round.
  • Venture debt has repayment terms of up to several years. 
  • The disbursement of the debt capital can be structured as a credit line in two phases: In the first phase, interest is paid (interest-only), and in the second, interest and principal are paid. This structure relieves the cash flow of a startup.

The downsides of venture debt

  • Venture debt providers cover their risks well. It means higher costs for startups. The costs are driven by three components:
  1. Upfront payments after the closing of the venture debt deal.
  2. Interest rates are higher than conventional loans and range from 8% to 15%, sometimes even more than 20%.
  3. Warrants give venture debt investors the right to buy shares in the company at a certain price. 
  • Warrants mean that there is a dilution of shares. Investors get co-determination rights and can actively influence the company. It limits the control of founders.
  • Some venture debt agreements come with an equity kicker. It's a provision that allows the venture debt lender to convert some or all of their loan into equity at a predetermined price. This gives the lender an additional stake in the company's success.
  • As with a VC investment, venture debt can take a long time. In the European Investment Bank's own words, up to nine months. That can be a problem for startups with an urgent need for capital.
  • Regardless of how a startup develops: It needs to pay interest on its venture loan. Startups may find themselves in a position where they cannot repay the loan within the agreed-upon timeframe. 
  • If interest or repayment installments cannot be paid, venture debt lenders can impose surcharges or, in the most extreme case, cancel the contract. 
  • Venture debt is given priority over equity investors, e. g. in the event of insolvency, the lender's claims are settled first.

Types of venture debt financing

As an alternative financing instrument, venture debt is available to startups in various forms.

Growth capital

As mentioned, startups use venture debt to finance their growth and the measures associated with it. Startups thus create a better position for the next equity round. For lenders, the allocation of growth capital is associated with significantly higher risks.

Equipment financing

If you want to grow, sometimes it is necessary to purchase specific goods. It can be new computers, office equipment, or servers. But it can also be machinery or raw materials for production. 

In this case, startups can use venture debt, which works as working capital. For lenders, this means less risk. If the startup cannot meet its payments, the venture debt firm can sell the goods or equipment. It thus serves as collateral for the lender.

Factoring

Startups can also use venture debt in the form of factoring or accounts receivable financing.

Factoring involves the startup selling its outstanding receivables from customer invoices to the venture debt lender. In return, it receives part of the invoice amount directly as capital from the lender. The lender charges a fee and then collects the invoice amount from the customer. 

The startup is immediately liquid and does not have to wait several weeks or months for money. It is particularly advantageous in the case of long payment terms. At the same time, the lender takes over receivables management, including dunning and collection procedures. Startups also save time and resources.

Bridge loans

Bridge loans are short-term loans intended to bridge the gap between funding rounds or significant business milestones. They provide temporary financing to cover operational expenses, payroll, and other urgent needs until the next equity round is secured. Bridge loans are often used by companies anticipating a near-term liquidity event.

The role of venture debt and venture capital

To better understand venture debt, it helps to have a look at venture capital. 

In general, venture debt follows venture capital – and that has consequences. The motives of the respective providers of debt and equity are often contradictory.

Who pursues which interests?

Venture debt investors carry the risk that the startup will neither make it to the next financing round nor be able to repay the loan. Therefore, they cannot afford a high default rate. Lenders hedge their risk with correspondingly high interest rates, subscription rights, or other collateral.

It is a different ball game with equity capital. 

In the case of venture capital, failure rates are part of the business model. VCs compensate them with a portfolio that is as diverse as possible, where one successful investment can make up for several failed investments.

Venture debt: high interest, high risks?

Venture debtors do not carry the same risk as VCs. However, they also do not participate in the success of the startup.

If a startup can no longer service its loan with venture debt and, in the worst case, has to file for insolvency, this has consequences for all shareholders. They rank after the venture debt lender. Accordingly, they are subordinated as investors in equity and receive money only after the claims of the venture debt lender have been serviced.

Focus on cost of capital

VCs will pay attention to their startups' cost of capital. If interest rates burden cash flow and restrict the scope for action regarding investments, the growth rate can be lower. It impacts a potential exit, and a VCs profit when selling the shares. 

Venture debt and venture capital are closely related. For startups, it is therefore advisable not only to deal with the terms of venture debt financing in advance. They must also consider the impact of venture debt funding on existing investors.

A list of venture debt providers

Venture debt has established itself as a popular alternative to equity-based financing. In addition to those already mentioned, these are among the most active venture debt firms for startups:

  • Kreos
  • Columbia Lake Partners
  • Blackrock
  • Claret Capital
  • Atalaya Capital
  • Bootstrap Europe
  • Flashpoint
  • Orbit Capital
  • Viola Credit
  • TriplePoint Capital
  • Hercules Capital
  • Pacific Western Bank
  • Comerica Bank
  • Western Technology Investment
  • Horizon Technology Finance
  • Wellington Financial 
  • BlueCrest Capital Finance
  • NXT Capital
  • First Midwest Bank
  • Canadian Imperial Bank of Commerce

Conclusion: take a closer look into venture debt 

Debt financing has increased in recent years. Startups have recognized that debt capital optimizes their capital stack and cost of capital. Generally, they still rely on VC financing, especially in their early stages. However, alternative options play an increasingly important role in further planning. 

Venture debt benefits from this development. It helps startups to master the capital-intensive growth phase and to scale their business model.

Venture debt complements equity-based financing in the financing mix of tech startups. It enables them to finance their activities between two equity rounds – without unnecessarily diluting their shares. However, it is not the only form of financing to secure debt capital.

Be aware of the repayment burden

However, venture debt also means taking on debt. And unlike equity, startups must repay debt. Therefore, they should avoid taking on too much debt at all costs. The consequences are carried not only by companies but also by the venture debt providers and equity shareholders. 

Startups should carefully evaluate a decision for or against venture debt. They should ask themselves whether venture debt funding is the right financial instrument and if the lender understands how the startup's business model works.  

Choose a venture debt provider that understands your business

After all, it must be clear to the lender what strategy the startup is pursuing, the possible risks of the market and business plan, and what KPIs define success. Why? It is because rapid company growth can lead to turbulence. Venture capital providers should deal with this professionally and pragmatically.

FAQs

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How do SaaS companies work?

SaaS stands for Software-as-a-Service and refers to a licensing and distribution model by which companies offer software solutions online as a service.

What growth stages do SaaS companies go through?

After the preparatory early-stage phase, the product goes live, becomes better known, and establishes itself in the market, before the customer base ideally expands significantly and finally either a company sale, a merger, or further growth takes place.

Why is revenue financing ideal for SaaS companies?

In the important second growth phase, when SaaS companies are already on the market and generating recurring revenue, revenue financing provides flexible SaaS funding based on the ARR without dilution or loss of control.

What is ARR?

ARR refers to annual recurring revenue. Specifically, in the subscription economy, ARR refers to the annual value of regular revenue generated through subscriptions.

What does ACV mean?

ACV stands for Annual Contract Value and in a SaaS business, it refers to the average annual value of a subscription - i.e., the holistic contract value excluding one-time fees divided by the contract term in years.

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What is a corporate loan?

As a counterpart to the personal loan, the corporate loan serves entrepreneurial purposes - as a short-term cash injection for liquidity needs or as an investment for long-term growth. Entrepreneurs use the borrowed capital, for example, for new personnel, a larger office, marketing, better hardware, or the company's establishment.

What kind of business loans are there?

A short-term business loan runs for a few months or years, while a long-term loan runs for several years. If a company needs capital quickly, an overdraft is an excellent short-term loan financing option - there are not many conditions to be met for this, as the principle is similar to an overdraft.

What are the providers of business loans?

There are many providers of business loans. Three overriding types come into focus:
- via the principal bank
- state-subsidized
- digital solutions
The first way is via the branch banks. The options are diverse, whether long-term or short-term credit, investment or working capital credit, just like the linked conditions. Subsidized corporate loans are also run through the house bank, but regional or nationwide development banks (such as KfW) are involved here.
Modern solutions come from FinTechs that specialize in smart financing. Whether credit or alternative, this is where startups and large companies meet technology-savvy innovators of the digital age.

What is the advantage of corporate loans?

A corporate loan is usually available quickly. In addition, because it is debt financing, founders do not have to give up control as well as company shares and do not have to share profits with lenders.

What is the disadvantage of business loans?

Business loans come with interest and are often tied to a specific purpose, so entrepreneurs are limited in how they can use the capital. It is also usually a restrictive concept with strict repayment terms, warrants, and very little flexibility - which is why many companies are looking for a suitable loan alternative.

How do credit and loans differ?

Some refer to short-term financial assistance and a smaller amount as a loan and to longer terms and higher capital as a loan. However, the terms are usually used interchangeably.

What are the interest rates on corporate loans?

They can be less than 1% or in the double digits. The credit rating determines this: the higher the risk class, the higher the interest rates. The amount of capital, term and any collateral also determine the interest rate. Therefore, it is always a good idea to compare different corporate loans.

Who grants corporate loans?

Companies can obtain the traditional loan from their principal bank - a government subsidy via federal or regional development banks is also possible. Modern variants come from FinTechs, which use technology-driven solutions for smart financing.

What are the alternatives to corporate loans?

Various financing solutions work with equity and debt. With equity financing such as venture capital, founders lose valuable company shares and often have to give a say. A particularly smart alternative to corporate loans and equity financing is non-dilutive, non-restrictive and very flexible turnover financing.

What is the best credit alternative?

There is no all-comprising answer to this question, as financing is always an individual solution. However, recurring revenue financing is increasingly establishing itself as a particularly attractive and popular alternative to loans and equity financing.

What makes re:cap stand out as an alternative to loans?

With re:cap, SaaS companies can obtain growth capital very easily and quickly - up to 50% of ARR. The innovative funding works with planned revenues and also flexibly aligns repayments accordingly. In addition to on-demand financing, re:cap offers valuable insights and benchmarks on request.

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What does debt financing mean?

In debt financing, companies receive a certain amount of money from an external investor. The company holds the debt capital for a limited period and must be repaid - usually with interest and within a fixed time duration.

What does debt capital include?

Debt capital includes typical liabilities of a company, such as loans, bonds, and provisions, as well as unique forms like deferred income.

What are examples of debt financing?

There are various types of debt financing, which can basically be divided into short-term and long-term debt. Unique and mixed forms are also possible - examples:
- Short-term: overdraft, trade credit, acceptance credit
- Long-term: promissory note loans, bonds, long-term bank loans
- Special form: leasing, factoring, asset-backed securities
- Mixed form: mezzanine as a mix of equity and debt financing

What is short-term debt capital?

Short-term debt capital is provided to companies for a short period of time - repayment usually takes place within a few months. Such capital is primarily used to meet short-term liquidity needs.

What is long-term debt?

Long-term debt capital is provided to companies for a longer period of time - repayment usually occurs within several years. The capital is used for investments.

What is the difference between equity and debt financing?

From the perspective of the capital providers, it is primarily a question of liability because, in the case of equity financing, capital providers are liable for entrepreneurial activities. In return, they usually receive a share and benefit directly from the profits. Because founders relinquish shares and entrepreneurial control, this is referred to as a dilutive type of financing. This is not the case with debt financing, which involves interest and is generally more restrictive.

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How can I finance my startup?

From bank loans to private savings to equity financing: There are many ways to finance a startup - through external providers and your own capital. As a novel and popular solution, so-called revenue financing is also becoming more and more established in Germany.

Which companies fund startups?

In addition to investment companies from the venture capital segment, there are innovative FinTech companies such as re:cap. They innovate to create modern funding solutions. re:cap enables companies in the subscription economy to trade future revenues for on-demand, non-dilutive capital. Fast, transparent and easy.

Who is startup funding with re:cap suitable for?

The funding solution from re:cap is specifically aimed at subscription companies that reach a growing customer base with their already launched product and generate predictable, recurring revenues. In addition, the legal entity must be at least partially located in the EU.

How quickly can I get startup funding?

As long as you are within your financing limit, you can access new funds as often as you like. The financing limit will be increased based on the growth of your business and the track record on the re:cap platform.
The funding will typically arrive in your bank accounts within two business days once it gets approved.

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What is working capital?

Working capital is also called operating working capital. It is the difference between current assets and current liabilities and, as a balance sheet ratio, provides information on companies' capital stock and financial strength.

What does working capital tell us?

The working capital figure shows which funds are tied up in regular company operations - it can also be used to determine whether working capital financing is necessary.

Is high working capital good or bad?

A positive value shows that current assets can cover current liabilities - this is important in terms of the golden rule of the balance sheet. A negative value conveys a risk, because affected companies are considered to be illiquid. This can lead to financial bottlenecks.

Can working capital be too high?

The question of working capital levels is answered differently depending on the company or business model - especially across industries. However, working capital levels that are too high often indicate that working capital is being used less wisely and that too much cash is being tied up.

What are examples of working capital?

In business management, working capital is usually indirect and long-term goods that companies need for their products and services. A distinction is made between tangible resources, such as warehouse and office space, and intangible ones, such as licenses.

How does working capital financing work?

Working capital financing allows companies to increase their working capital and generate positive value. It provides them with short-term cash to pay liabilities or make investments.

What are the different working capital options?

Working capital financing is multifaceted. Depending on the industry and business model, various types may therefore be considered, such as drawing on the credit line, receivables credit, factoring, and inventory lending. Increasingly popular are alternative solutions such as non-dilutive and non-restrictive sales-based financing.

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What is a convertible loan?

The definition of a convertible loan is simple: it is a normal loan in which the company does not repay the borrowed amount after the expiration of the term, but converts it into company shares. It is therefore technically a combination of both equity and debt.

How does a convertible loan work?

The following scenario is a typical example of a convertible loan: A company receives capital with a predefined interest rate. The parties agree on a term and also a discount on the company's shares, which acts as a risk compensation. At the end of the term, the investor receives the shares in the amount of the convertible loan plus interest - so-called qualified capital for the company.

How high are convertible loans?

Usually, convertible loans are around 100,000€ - but they can also be up to 400,000€ and more. To collect as much capital as possible, start-ups often arrange several convertible loans with different investors.

What should a convertible loan agreement regulate?

In principle, there is freedom of contract here - a convertible loan agreement is therefore not subject to any legal rules. The following components are the basis: the amount of the loan, the interest rate and discount, and the term. In addition, some parties agree on a cap (maximum valuation) or a floor (minimum valuation). Subordination is also included in many convertible loan agreements.

What is an alternative to the convertible loan?

Founders can obtain convertible loans quickly and easily and use them flexibly. These advantages also characterize re:cap's convertible financing. However, convertible financing involves giving away shares. This is not the case with re:cap's solution, which is non-dilutive funding for sustainable growth. Therefore, it is an ideal alternative to the convertible loan.

FAQs

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Is crowdfunding free of charge?

No. In case of success - i.e. if your project reaches its target budget - you pay platform and transaction fees between 4 and 12 percent to the crowdfunding platform. The exact amount depends on the platform. If your campaign fails, you pay nothing.

Why is crowdfunding so popular?

Crowdfunding brings many advantages. The fact that the legal form and creditworthiness of the project do not play a role in crowdfunding certainly plays a major role in its popularity. Thus, especially creative people and artists of all kinds, as well as non-profit initiatives, can collect money for their projects. The positive marketing effects, as well as customer proximity and loyalty, also ensure the good reputation of crowdfunding.

Who is crowdfunding suitable for?

Crowdfunding originates in the artistic sector for financing various creative projects in the fields of music, film, theater, and art. Today, however, it is also used by private individuals, non-profit organizations, and companies of all kinds - whether in the startup phase or as a boost in ongoing operations.

What are the different variants of crowdfunding?

There are four types of crowdfunding, which differ primarily in the consideration:
1) In equity based crowdfunding, investors receive returns on their investments.
2) In reward based crowdfunding, the initiators provide non-cash or intangible compensation for the investment.
3) In donation based crowdfunding, investors donate their contribution.
4) In lending based crowdfunding, the investors grant private loans with a fixed interest rate to the initiators.

How do I receive crowdfunding?

Whether you are a startup or a medium-sized company: crowdfunding can theoretically be 'applied for' by anyone. However, success depends on how many investors are convinced by the project. Anyone who wants to try their hand at crowdfunding must first create a campaign on one of the common crowdfunding platforms and advertise it on their own channels.

Does crowdfunding make sense?

Crowdfunding offers particularly many advantages for private, non-profit, and creative projects - or as a supplement to public funding. In addition, crowdfunding can be particularly worthwhile for early-stage startups that have largely completed their product development and now need fresh capital for growth. Young companies that want to test their business model or product can also benefit from the communication and participation of a crowdfunding campaign - providing an indicator for other forms of financing.

Is crowdfunding proprietary or debt financing?

Crowdfunding is financing based on debt capital. The capital provided comes from a large number of investors, mostly private individuals and companies - the so-called crowd or swarm. Hence the term 'crowd financing'.

What are the alternatives to crowdfunding?

Crowdfunding is considered an alternative financing option, which is opposed by several common alternatives (or supplements). Among them are public funding, corporate credits, venture capital, or even founder competitions. Newer forms of financing, such as re:cap's recurring revenue financing, offer another alternative to crowdfunding.

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What is factoring?

The definition of factoring is simple: to quickly receive the money from open invoices and generate liquidity, companies hire a factor who settles the outstanding payments as an advance and takes over the accounts receivable management. It is therefore a sale of receivables.

How does the selling receivables work?

The factor checks the verity of the invoice and the creditworthiness and default risk of the debtor. Then the factor pays the majority of the outstanding invoice amount to the contracting company, usually within 48 hours. After the factor has collected the receivable from the debtor, the company receives the remaining gross amount that the factor has retained as security.

What types of factoring are there?

Anyone interested in factoring should take a closer look at their options because there are differences. In recourse factoring, the factor bears the full risk of default. Less secure - from the point of view of the selling company - is non-recourse, in which there is no protection against bad debts. If companies do not want their customers to know about factoring, they can choose the silent option.

What are the risks involved in factoring?

Since there is a large number of factoring companies, companies can quickly end up with a provider whose credit rating itself is weak. However, the performance of a factor is not always directly apparent. In the worst case, the assigned factor goes insolvent and the company loses a lot of money. In addition, some customers see it as a sign of mistrust if it is not the company providing the service that demands payment but a third party unknown to them - this could be circumvented by silent factoring.

What are the costs of factoring?

There is no single answer to this question because the fees are very opaque - based on various key business figures. In addition, the total costs are not only made up of a clearly defined factoring fee but of several items. Interest often accrues as well.

What are the most popular alternatives to factoring?

TexSince factoring is revenue-based financing, other revenue financing options are also great alternatives to factoring. This is also true for re:cap's solution - it is tailor-made for companies with a subscription business model that generate predictable, recurring revenue.t

FAQs

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What are venture capital alternatives?

Venture capital is not suitable at all times - and not for every type of company. Common alternatives are:
- Venture debt (hybrid debt financing),
- Founder competitions,
- Government subsidies
- or alternative forms of financing,such as crowdfunding.
Companies with subscription business models can also exchange their future revenues for immediately available capital - with re:cap financing.

When is venture capital worthwhile?

Generally for founders and entrepreneurs in the growth phase. But not every startup is attractive to investors. Venture capital funding is worthwhile when the business idea is innovative, the sales argument is clearly recognizable, and the founding team is convincing. In addition, the market must promise growth.

How do I get venture capital?

Private venture capitalists, also known as business angels, and so-called venture capital companies provide equity capital. But not just like that. If you want to go into fundraising, you have to be convincing. Prerequisites are a watertight pitch, a realistic understanding of the current company valuation, the amount of capital needed and the time frame in which the capital is needed.

How does venture capital work?

Venture capital is a form of private equity financing in which venture capital companies provide capital to promising unlisted companies in exchange for a stake in the company. Those who want to grow their company with venture capital must first contact investors and convince them of the company's merits.

How long does venture capital take?

Often several months pass between the start of fundraising and the receipt of venture capital. The pitch only follows after the founding team has identified potential investors. Afterward, the company is preliminarily reviewed by the potential investors. If this goes well, a term sheet is signed, followed by due diligence. The capital will flow only when the investment documentation has been completed.
If you can't or don't want to wait that long, you can look for alternative forms of financing like the one offered by re:cap. With re:cap you can bridge the time to the next round and thus, optimize the upcoming financing round. At the same time, this increases your options when looking for investors.

FAQs

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What is alternative financing?

These are forms of financing that companies can use as an alternative to established models such as loans - they are often modern solutions that are quickly and easily available digitally.

What are the different types of alternative financing?

The market for alternative financing options is growing, so companies can already choose a model that suits them individually. The better-known ones include convertible loans, factoring, crowdfunding, and venture debt. Alternative debt instruments, including recurring revenue financing or revenue-based financing, which have been successfully established in the U.S., are still rather new in Germany but becoming increasingly well-known and popular.