On Tuesday, Peter Renton met with fintech lenders to talk fundraising in a cautious credit market.
When funding rounds are down and smaller than they used to be, some fintechs switch to asset-based and venture debt to keep kindling on the burn rate pile.
Fintechs are reacting to uncertainty about public markets, changes in venture capital deployment, and looming recessionary fears. Lenders are turning to the worlds of asset-based and debt financing.
Peter Frank, Managing Director of i80 Group; Prath Reddy, CFA and President at Percent; and David Gens, Founder, and CEO of Merchant Growth, joined the talk to examine the benefits and opportunities of a new way to fund.
Watch the webinar On-Demand here.
The difference between asset-based and venture
From his experience at Percent, a VC-backed software services company catering to private credit, Reddy began with a broad definition of the collateral elements, structure, and debt location on the balance sheet.
“Collateral in an asset-based loan or the debt has a hard or financial asset backing, and venture debt it has an optional backing,” Reddy said. “From a location standpoint, because asset-backed deals need to sit as close to assets as possible, they are segregated in a bankruptcy vehicle and serviced by cash flow within that vehicle. Venture debt typically sits at the corporate level, alongside equity investors and convertible debt that might fund the company.”
He said from an upside perspective, venture debt may come with details that give the lender equity, but for asset-based lending, deals may or may not include equity. Especially in this market, those regular aspects of debt deals are ever-changing, Reddy said.
Use cases
Gens laid out the different use cases of the two types of funding. Founder of Merchant Growth, a prominent Canadian online SMB lender, Gens also manages a merchant fiance fund, so he said he also understands the investor side. He explained that venture debt is to grow an operation, while Asset based debt directly funds the loan book or products.
“Venture debt is typically used to grow an operation and continue the growth demonstrated to date, whereas asset-based lending is really to fund the assets themselves and fund new loans and so forth, given that the borrowing amount is tied to the assets.” Gens said. “One thing I’ve seen with some fintech lenders is maximizing the asset-based lending available to them and, in some cases, using a bunch of that money to fund their operation.”
Gens said that in that way, overleveraged funds could get ahead of themselves.
Sometimes, asset-based is too much
Frank said at i80, he helps manage asset-based lending, primarily for early-stage fintechs through series C and D rounds and capital commitments from $25 to $200 million. He said the two types of funding are also tied to the burrowing fintech size. Asset-based is a very structured and specific model, and many new-to-market fintechs do not yet have a perfect product-market fit or customer.
“Often will be working with companies that have just recently gone to market or are in the process of going to market and scaling up. This idea of product market isn’t fully established.” Frank said. “They still need room to develop and figure that out, and it can be tricky to do that with an asset-based facility.”
He said venture debt is a better tool with smaller sums because there is much less restriction for what those funds can be used for.
“Frequently, a company doesn’t need $15 million or right, much greater sums that right out of the gate and asset-based facility might not be right,” he said.
