In the latest sign of an ever more developed p2p lending market, Crowd2Fund have announced a new Venture Debt product. This is targeted at established businesses who have a short term requirement to access cash to facilitate their growth. The interest rates on these loans will be 10%-15%, although this sounds expensive its still cheaper then equity finance for businesses and much simpler.
Venture Debt will typically be used for a particular project such as purchasing new stock upfront, entering a new market or opening an additional retail unit. Venture Debt is higher risk but is not a sub prime market as enhanced due diligence and careful selection is needed.
Where possible the business can also leverage investment from their customer base or even offer a product perk to offset the level of risk for investors.
The first Venture Debut campaign to launch on the platform is Planks Clothing, a manufacturer of ski clothes, who are borrowing funds to purchase stock for the next ski season. A deeper understand of the business model is needed and the due diligence process is not just based on historic performance but also future forecasts. This campaign has reached 85% of its target within 24 hours showing investor demand for Venture Debt.
Specifically, they are choosing to raise Venture Debt as it is cheaper and easier than running an equity crowdfunding campaign. They have been able to demonstrate the security available on the loan and also how they will be able to maintain it. It means that they won’t have to sell any equity from their business.
What Is Venture Debt?
Venture Debt is typically used as project based finance for a specific purpose. It differs from traditional debt due to the level of risk as these businesses are earlier stage and are due to carry a higher interest rates, normally at more than 10%.
It will be used by businesses which are already generating revenues, and will be able to service the debt. Unlike traditional debt these businesses do not necessarily have to have two years trading history and revenues over £100,000 and 6 months of profitability.
Crowd2Fund’s credit assessment of businesses seeking Venture Debt takes into account reviewing strategy plans of the business, the previous business activity of the founders, as well as the company’s historic trading data. The increased APR of Venture Debt is indicative of the increased level of risk.
Whilst this enhanced form of due diligence will mean that only the most credit worthy venture debt deals make it onto the platform, and Crowd2Fund’s still have a 0% default rate, some failures should still be expected.
What Types Of Businesses Is Venture Debt Suitable For?
Venture debt is suitable for earlier stage businesses which are fast growing, typically at a rate of 50% year on year, and who would not normally have access to traditional to debt. If they have public appeal and an existing customer base then that’s a bonus.
Whilst these businesses could sell equity to raise funds, this is often not their preferred option due to them not wanting to sell parts of their company, at a relatively low price early on in their lifecycle.
The profile of these businesses is high quality, typically run by people who already have a proven track record.
Why Would A Business Choose To Take Out A Loan With An Interest Rate As High As 15%?
Whilst a 10%-15% interest rate sounds high, this is relatively cheap due compared to selling equity and founders can also keep control of their company. Raising debt finance is also considerable less work than raising equity as it’s much simpler.
What Are The Implications Of Venture Debt For The Investor Market?
Venture Debt will allow sophisticated investors to participate in a new asset class, generating potentially higher returns than existing comparable products on the market.
The weighting of Venture Debt opportunities in an individual’s portfolios will be based on their risk appetite and investment objectives. Investors with less tolerance for risk should not participate in Venture Debt.