Some lenders foresee benefits of a new business venture and offer venture capital loans for the same. The IT revolution brought venture capital loans into the limelight as many reputed businesses like Yahoo and Facebook were supported primarily by venture capitalists in their initial days.
Venture Capital Loans Vs Other Loans
- Lenders offer money primarily to earn interest income. Venture capital loan providers offer money primarily to enjoy profits from a fledgling business venture having lots of potential. Traditional lenders will shy away from ventures that do not have an established business module and are not run by experienced individuals. On the other hand, venture capital providers base their decisions solely on the potential of the new idea in the hands of a not so experienced entrepreneur.
- Traditional lenders offer debt. Venture capital loans offer money as loans but seek to convert it into equity to enjoy better dividends. The money loaned may attract interest but the real income lies in high returns after the business becomes a success.
- Traditional lenders keep the option of intervening in the day to day management of the business as a last resort. Lenders seek changes in management or intervene only after default in repayment has occurred and there is risk of the debt turning bad. Those who offer venture capital loans prefer a more hands on approach. They provide tips, guidance and assistance to the entrepreneur to break even faster. They work as a combination of mentors and lenders.
Benefits of Venture Capital Loans
- Lenders are aware of the risks involved and are patient if things take longer than expected to fall in place. They are more interested in making the business successful as compared to recovering their interest dues on time.
- Securing loans from reputed professionals who are recognized as experts in their own fields will automatically improve brand value of the new business.
- Guidance and assistance may also extend to tips and pointers towards the right set of individuals to employ.
Risks Involved In Venture Capital Loans
- An overbearing lender may micromanage his business. This may lead to loss of control.
- Dilution of equity stake is unavoidable. Venture capital loans are offered primarily to help the lender secure a portion of future profits.
Finding and impressing the lender is a very tough task. Different lenders have different priorities. The task of securing finance may become a full time task if one searches for venture capital loans.