One of the most classic use cases for using a loan is funding large capital expenditures – including acquisitions. In general, venture debt allows companies to use the proceeds from the loan to make large purchases without depleting the company’s cash balance or going through a round of equity and consequent dilution.
Companies, such as manufacturing companies, can be confident they can service the loan used to fund the purchase of new equipment given the additional EBITDA generated from adding production capacity. On the other hand, as we shift towards cloud-based software companies, large capital expenditures are much less common. In the case of acquisitions, be aware that generally the entire purchase price of an acquisition cannot be funded with debt since the lender has no cushion in the enterprise value. However, this doesn’t mean that a founder has to raise equity from a VC to complete an acquisition. The seller may be willing to take a combination of cash plus equity in the combined company. In this situation, equity is used without having to raise additional funds from VCs.
