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Bank loans vs VC: what freedoms will I give up?

The short answer is very few, but it’s worth establishing the difference between Venture Capital (VC) and bank loans.

VC is high risk, high reward. Investors will take a stake in a business to benefit from the equity upside on the ‘winners’ in order to offset the losses on the ‘losers’.

The terms and conditions of VC will vary, but their equity investment will grant them a seat on the board and they may seek consent rights – as such this may impact your freedom as the founder of a business.

In taking on a bank loan the business won’t relinquish any control, but bank debt will come with covenants around EBITDA/leverage and debt service, so management are committed to managing the financial performance of the business to ensure that it meets the parameters set out in the facility documentation.

The bank will usually take a first ranking debenture over the fixed and floating assets in the business. This means that the bank can appoint an administrator and has first claim to the assets if the company goes into administration.

It is important to note that the bank doesn’t benefit from equity upside, so will not be in a position to take equity risk. As such debt financing can be more difficult to secure from a credit perspective in early stage tech businesses, but when it is available it will be much cheaper than other forms of finance.

I must caveat this with the fact that although it is can be difficult to secure senior debt, it is certainly worth investigating, particularly if you have a tech-aligned team within your bank, as your relationship director will be more familiar with similar companies in the sector and can use this experience to structure the most appropriate facilities to support the business.

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