A guide to venture debt

The funding scene is constantly evolving and chief among the latest P2P lending innovations is a service called venture debt.

Crowd2Fund first launched venture debt last year, and the service has already helped a number of companies secure funding and scale their business activities. Now, Crowd2Fund plans to roll out this product on a wider scale, opening the market up to a wider range of exciting businesses. 

It's a great solution for project-led funding and is popular among younger firms because of its more flexible criteria and wider goalposts.  

Unlike other forms of debt, venture debt removes many of the barriers faced by entrepreneurs, like the need to provide two years’ filed accounts and proof of a £100,000 turnover. Instead, the Crowd2Fund risk team vets potential recipients individually, taking into account their assets and growth prospects.  

In other words, the Crowd2Fund team approves successful candidates because of their potential, plus their products and services. Special consideration is shown to individuals and organisations operating in an ethical and socially responsible manner.

What about security?

Security is always a factor with debt funding, so anyone seeking finance through venture debt is still required to prove that they are solvent. However, they don't need to be a homeowner, which avoids exclusivity.

Who can benefit?

Crowd2Fund offers up to £1m via venture debt, with interest starting from 14% APR. This higher interest rate reflects the diligence of the Crowd2Fund team. In turn, this means that investors have a great opportunity to earn impressive returns while supporting growing businesses. Investments can also be included within the Innovative Finance Isa, which means that earnings are tax-free.

This does mean the funding avenue suits some businesses better than others due to the cost. However, these rates are competitive and outperform what some businesses would be offered by other lenders, such as banks. In this case, some businesses would only be able to access equity finance, so venture debt presents the opportunity for affordable debt funding.

What makes venture debt different?

Aside from the easier access and higher interest, the key factor separating it from the rest of the field is the fact that repayments are in direct proportion to revenue. Following the structure of a revenue loan, each monthly repayment is calculated as a percentage of monthly turnover. Therefore, this is particularly well suited to fast-growing businesses who may experience slight fluctuation in income.  

In addition, venture debt allows successful applicants to reduce the cost of finance on their loan in exchange for providing goods and services to investors, positioned as rewards. Think of it like a Kickstarter model, but with more sophisticated and established companies. This not only provides interested investors with a unique opportunity to sample the goods their money is financing, but it directly assists the firms themselves and provides an opportunity for them to grow their client base.

Venture debt also differs from equity-based crowdfunding, which is typically the most common finance option available for early-stage businesses. However, under the terms of venture debt, the business is not required to give up any equity, which is good news for founders.  

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