Face Off: Evaluating Insured Technology Financing vs. Venture Debt

Given recent events impacting the technology sector and correlated financing, questions are understandably being raised regarding technology banking and venture debt, while many companies have begun exploring viable alternatives. 

What’s Happening? 

Banks, especially those with technology banking practices, have historically been a leading provider of loans to startups and growing technology companies. One such bank, which previously held more than 50% of market share, recently crumbled in a matter of just days, with other regional or specialized banks seeing rating downgrades or simply a drop in consumer confidence. The continued fallout over the past few weeks has created uncertainty around technology banking, leading companies to look to other avenues for debt financing.

Once the first domino fell, the supply for debt capital was suddenly and severely cut. This lack of supply gives opportunity for other debt providers, including venture debt and other alternative solutions, like PIUS’ insured technology financing.

We are already seeing the impact of this limited supply, with venture debt providers increasing rates and being even more selective with borrowers, and the rise in rates and increased selectivity will limit which companies have access to venture debt, while becoming increasingly expensive for those that do have access. As venture debt becomes less attainable, alternative debt providers that can keep costs comparatively low will have an advantage.

PIUS vs. Venture Debt

Venture debt providers make money off the capital and are responsible to their limited partners, so they are incentivized to charge more. PIUS, however, makes money on the insurance, so we are incentivized to keep costs as low as possible to keep as much money in the company as possible, increasing the likelihood of the loan being paid back in full. 

Venture debt loans, to their credit, tend to have less structure, such as minimal to no covenants, and can have lengthy interest-free periods. While PIUS’ insured loans include covenants, because of its unique alignment of interests, PIUS does not charge warrants, prepayment penalties, exit or success fees. These loans are also based on market interest rates, which will be lower than venture debt rates.

Finally, what makes PIUS unique compared to other debt providers, is the evaluation of the intellectual property (IP) and other intangible assets. Because PIUS underwrites to the strength of the IP and the credit, not to the next equity raise like venture debt providers often do, whether a company is VC-backed has no bearing on PIUS’ evaluation, and therefore the loan amount.

Options for Borrowers

Many technology companies have been caught off guard amid the recent banking chaos. For growth-stage technology companies considering their next debt or equity raise, alternative solutions, like PIUS’ insured technology financing, can provide the liquidity they need at costs they can afford.