What is venture debt?
Venture debt is an innovative form of working capital and growth financing for technology companies. Espresso’s venture debt solutions are designed to be fast, fairly priced and user-friendly sources of capital that can be used by companies as an alternative or complement to other sources of financing. Espresso provides venture debt in the form of accrued Tax Credit Financing, Recurring Revenue (SaaS) Financing, and Working Capital Financing.
How does venture debt compare to bank financing?
Conventional bank financing is typically backed by easy-to-monetize tangible assets such as accounts receivables, inventory, equipment and real estate. Most technology companies possess minimal tangible assets and therefore have limited access to conventional bank financing for working capital purposes, let alone to fund growth investments. In addition, banks generally limit the amount of credit they are willing to lend companies that are burning cash.
Venture debt is a form of risk capital structured to reflect the unique needs and inherent higher risk of early and growth stage technology companies. The cost of venture debt is higher than bank financing due to this elevated risk. In situations where venture debt is used with bank financing, it is often subordinated to bank financing (meaning the bank has first claim on all the assets of the company in the event of liquidation ahead of the venture debt provider). This is why bank financing is also referred to as senior debt.
How does venture debt compare to equity financing or convertible debentures?
Equity financing and convertible debt represent the higher risk components of a company’s capital structure, and therefore are the most expensive forms of capital available to a business. Equity financing can take the form of common or preferred shares. Preferred shares will rank ahead of common equity in liquidation preference, and may also provide the investor preferred returns and other economic and governance rights. Convertible debenture investments in early stage and growing technology companies are debt instruments designed to convert into equity at a future date. While in the form of convertible debentures, these instruments rank ahead of both common and preferred shares in liquidation preference.
Most senior and venture debt providers view convertible debt as a form of equity because of the associated conversion rights, and expect the convertible debt holders to subordinate their security ranking to both senior and venture debt.
Why Espresso Capital?
Espresso was founded in 2009 to provide innovative financing solutions to early and expansion stage technology companies. We have provided over $120 million in loans to over 200 companies since inception. Our financing solutions bridge the gap between equity and traditional sources of debt financing. We’re proud to provide fast, fairly priced and user friendly growth capital to help entrepreneurs and investors reach their strategic and financial objectives.
How does the cost of venture debt compared to other forms of financing?
Bank financing is low risk capital and therefore has the lowest cost. Equity financing is the highest risk capital and therefore has the highest cost. Venture debt sits between these two types of financing and therefore costs more than bank financing but less than equity financing. Espresso’s venture debt solutions are priced according to the borrower’s risk profile, and will vary accordingly.
How does Espresso financing work?
All Espresso financing solutions come in the form of a credit facility. Each credit facility will have a credit limit based on the borrower’s specific circumstances, which is reviewed at mutually agreed intervals.
The borrower can draw down against the credit facility up to the authorized available credit, which in the case of Tax Credit Financing will fluctuate over time based on the value of outstanding tax credit claims plus the accrued tax credit balance. For Working Capital Financing, available credit will vary with the value of the underlying working capital assets (eg. accounts receivable). In the case of Recurring Revenue Financing, the credit limit should increase as the company’s monthly recurring revenue grows.
What are the qualification criteria for Recurring Revenue Financing?
Our Recurring Revenue Financing is specifically designed for SaaS and other sticky, high margin, subscription or transaction-based revenue companies. If your company has demonstrated predictable and profitable customer acquisition and achieved minimum operational scale (operational break-even before sales expansion expenditures), your company can benefit from our Recurring Revenue Financing. To learn more about the SaaS unit metrics we use in assessing Recurring Revenue Financings click here.
How does Recurring Revenue Financing work?
Our Recurring Revenue Financing is structured as a credit facility, allowing you to borrow up to 6 times your trailing three month average monthly recurring revenue. We review your recurring revenue on a quarterly basis, adjusting your credit limit accordingly. As your recurring revenue base grows, so does your credit limit.
Is Espresso’s Recurring Revenue Financing the same as “royalty financing”?
No. Espresso’s facilities bear interest at a fixed rate that is set at the outset of the loan. The amount of monthly interest payable is not impacted by growth in your revenue.
What are the qualification criteria for Tax Credit Financing?
Espresso provides financing for a wide range of tax credits including SR&ED, various provincial digital media tax credits, Quebec’s Tax Credit for Development of E-Business, and Quebec and BC mining and exploration tax credits. Other types of government incentive programs that are funded in arrears (i.e. after you incur qualifying expenditures) may also qualify for pre-funding. Qualification criteria include past track record of successful claims, good quality record keeping systems to ensure all supporting documentation is well organized and current, and sufficient cash resources (including Espresso funding) to fund the business’ cash flow needs until receipt of the tax credit refund and repayment of the Espresso loan.
How does Tax Credit Financing work?
Our Tax Credit Financing is structured as a credit facility, available to you in as little as 10 business days. We are able to fund against both filed and accrued future tax credit refunds maximizing your total available financing. Upon receipt the tax credit refund is applied to reduce your loan balance. For early stage companies, it can finance your critical next steps in product development and go-to-market. For expansion companies, it can maximize your total funding between equity rounds.
How do I apply for Espresso financing?
The best way to get started is to arrange an introductory call by contacting us via email, telephone or our web based form.
Following the introductory call, we will send you a link to our online loan application and a request for specific documentation. The loan application, which should take no more than 20 minutes to complete, allows us to quickly assess your suitability for financing. We can typically issue a term sheet to qualified borrowers within 24 hours of receipt of the loan application.
What’s involved in due diligence?
The due diligence process will depend on the type and size of financing being sought, and also on company specific circumstances. We strive to be super efficient with our diligence process, ensuring we make best use of your valuable time and our due diligence resources. Generally, due diligence for Tax Credit Financing can be completed within a week. Due diligence for Recurring Revenue Financing and Working Capital Financing will generally take longer as these facilities require deeper operational review. We recommend that borrowers’ designate a lead individual to coordinate due diligence, and where possible, assemble the due diligence materials while the term sheet is being finalized.
What is the typical turnaround time to complete a financing?
We can close Tax Credit Financings in as little as 10 business days and Recurring Revenue and Working Capital Financings in as little as 30 business days. The key to a quick closing is your level of preparation, including assembling due diligence materials while we negotiate the term sheet. If you have a complex capital structure and require approvals from multiple parties, we suggest you notify the relevant parties early in the process. The term sheet will list the standard intercreditor agreements we require with your other lenders, and once executed, you should reach out to these lenders to alert them of the anticipated closing date.
Do I need a lawyer?
Technically, you don’t need a lawyer to review and execute the legal documents but we will need to know this ahead of time as our legal package needs to be adjusted accordingly. If you opt not to use legal counsel, you will have to provide us confirmation that you have waived independent legal advice.
What are typical legal fees?
Our legal package is highly streamlined and standardized in order to minimize your total legal bill. The typical legal fee for a Tax Credit Financing for a company with a simple legal and capital structure will range from $3,000 to $5,000. If you have a complex corporate structure and/or many past and present lenders, the cost may increase as more agreements will have to be negotiated with more parties, and more registrations will be required. The best way to minimize your legal bill is to avoid unnecessary changes to our standard legal packages.
Can I see a sample term sheet?
Absolutely. Once you’ve been qualified for one of our financing solutions we will share our term sheet outlining our standard terms and conditions. The term sheet is identical to our final credit facility agreement, save the representations and warranties, and other standard terms including default provisions and covenants.
Does Espresso play nice with my existing and future lenders?
Yes we do. We will subordinate our security to your existing senior lenders (i.e. Bank financing) in return for a priority on any tax credit we finance. We believe you should take advantage of low-risk, low-cost bank financing whenever you can, and we’ll adjust our leverage thresholds accordingly. In situations where you have existing subordinated debt, we will need to negotiate inter-creditor agreements with your other subordinated debt lenders. We generally expect to rank ahead of all convertible loans.
What security registrations do you require?
All loans require a general security PPSA registration. Our registration ranking relative to your other lenders is determined by the intercreditor agreements negotiated between us and your other lenders (as specified in our term sheet).
What legal agreements are required to complete a financing?
The primary legal agreement governing an Espresso financing is a credit facility agreement (essentially the term sheet, with schedules containing representations and warranties, loan covenants and default provisions). All loans also require a security agreement. In cases where other secured lenders are involved, inter-creditor agreements amongst the various lenders will also be required. All loans require proof that the borrower is in good standing and has the requisite approvals to complete the transaction, typically in the form of a directors’ resolution.
What do I do if my circumstances change during the term of the loan?
Contact your Espresso representative and let us know about the change in your circumstances. We will do our best to accommodate your needs. Our legal agreements are designed to easily accommodate changes without requiring a new set of legal documents.
Can I prepay a portion or all of the proceeds before the maturity date? Are there any penalties involved?
Our short term loans have a minimum interest periods of 3-6 months; you can prepay a portion or all of your loan subject to satisfying this prepayment period. Longer term loans may have longer minimum interest periods.
What do I need to do to borrow more money in the future?
Our loans are structured as credit facilities with a defined maturity based on your circumstances. Generally speaking, future loans require updated diligence and minimal changes to your existing credit facility agreement.
What is an RC59 form and why do you need it?
Our loan compliance includes monitoring that your are current with your CRA obligations (including payroll remittances, HST/GST payments, and corporate taxes) as these obligations rank ahead of our security. The RC59 allows us to view your CRA account activity for compliance purposes and nothing more.
Does Espresso finance digital media tax credits?
Yes. Espresso Capital can finance digital media claims even prior to you receiving your certificate, especially if you have a history of receiving the tax credit in the past.