![]() ![]() ![]() “Covenants tied to lines of credit can be very challenging.” Founders say venture debt needs an overhaul “It always seemed a bit predatory,” Wang said. So when the bank failed, they either faced the very real prospect of their businesses shuttering overnight – or they risked violating the terms of their venture debt loans with the bank. The AR line provided her company access to short-term working capital – using her accounts receivable as collateral, she said.Īt least five other founders told LinkedIn News that they too had parked most of their money at SVB due to financing or credit solutions that the bank offered to early-stage startups like theirs, which locked them into exclusivity clauses of varying scopes, and limited their ability to diversify. Wang was tied to SVB because of an Accounts Receivable (AR) Line of Credit that she had with the bank, which meant all her deposits sat with SVB too. But she panicked as she was one among several founders caught in the crosshairs when the once-storied tech institution came tumbling down last week after a bank run. She wouldn’t have been as worried had her startup, The Flex Company, not done all of its banking with SVB. Lauren Wang was on the floor of the consumer packaged goods trade show Expo West at the Anaheim Convention Center last Thursday when she began receiving frantic texts from fellow founders about Silicon Valley Bank. Zooming InĪ deep-dive into one big theme or news story every week. Follow me on LinkedIn for other tech updates. ![]() “When the IPO market shuts down, venture lenders find it harder to collect on their loans.Welcome to this special edition of LinkedIn News Tech Stack, which brings you news, insights and trends involving the founders, investors and companies on the cutting edge of technology.Īs always, let me know if you have ideas or feedback on something that could be a fit by sending me an InMail. “Venture debt is inherently risky for the simple reason that most startups do not have collateral that the lender can sell to repay the loan if the borrower can't pay,” Cohan explained. These other components include an underwriting fee, backend fee, and warrant package, according to Ellison.īut even if a startup can secure new debt financing, there are downsides. “Once the existing pipeline is worked through I expect we will see pricing increase but it will mainly be from the non-interest components,” said Ellison. With competition for fewer lenders, borrowing is likely to get even more expensive in the future. Yet today, the prime rate is 8%, making the base rate far higher for borrowers. Non-bank loans are offered at the same prime rate plus generally 6% to 8% interest, according to Ellison. Last year, SVB was generally offering venture loans at the prime interest rate, which was about 3.25%, plus up to 2% interest. These non-bank loans are costly for startups compared to the deal they got with SVB. “If a company raised a year ago and they haven't raised an equity round recently, but if they still have a decent runway and the metrics are right, the still make a new loan,” said Jung. While typically a bank like SVB would only extend venture debt along with a funding round, private lenders tend to give startups more leeway, according to Jung. “For our clients, we've been talking actively with the direct lenders like Western Technology Investment and Trinity Capital because they're a little bit more flexible,” he explained. “Don't expect the bank-led venture debt to be returning in full force anytime soon,” said Jay Jung, a fractional CFO and advisor with Embarc Advisors who helps startups structure their venture debt financing. Unlike banks, which provide a range of services of which loans are just one, the business model of these private lenders is to make money from interest on debt. “SVB failing was the best thing that could have ever happened for non-bank venture debt lenders,” said Zack Ellison, the managing partner at A.R.I. So who has been rushing to fill the lending hole left by SVB for startups in need of extending their runway? Private, non-bank lenders, who notably charge higher interest rates. ![]()
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