Are Bank Loans for Tech Start Ups Better Than Venture Debt (Australia)?

With more than 15 years in the Australian tech industry, I’ve seen first hand how important financing is to enabling new, innovative companies trying to survive and thrive. The choice between venture debt and more traditional business loans can make all the difference to a startups growth path, equity structure and overall financial health.

That’s why we’ll do a deep dive here on each funding option, and provide insights specific to the Australian tech startup landscape.

Quick Comparison Table – Bank loans for tech start ups

Feature	Venture Debt	Bank Loan
Typical Providers	Xero Capital, OneVentures, Leap Capital	Commonwealth Bank, ANZ, Westpac etc.
Eligibility	Venture-back start-ups, high growth potential, may not be profitable	Established business history, consistent revenue, often requires profitability
Loan Amount	$1 million – $50 million	$50,000 to over $5 million (varies widely)
Interest Rate	10-15% annually	5-8% annually
Term Length	3-4 years	1 – 5 years (can be longer)
Repayment Terms	Often interest only (up to 12 months) before principal repayments	Typically principal and interest
Collateral	Generally unsecured, but may include warrants	Often requires collateral or personal guarantees
Impact on Equity	Minimal dilution (potential warrant conversion)	No direct equity dilution
Flexibility	High – designed for high growth companies	Lower – standard banking terms
Speed of Funding	Typically faster (2-4 weeks)	Can be slower (4-8 weeks)
Additional Benefits	Network access. Potential follow-on investments	Building banking relationships, access to other banking services
Best Suited For	High-growth, VC-backed startups, Pre-profit companies	More established startups, Companies with consistent revenue
Key Risks	Higher interest rates, potential for aggressive collections	Strict edibility criteria, personal guarantees may be required

The Australian Tech Startup Landscape

Before we get into the weeds of venture debt and bank loans let’s take a quick look at the Australian tech startup landscape. As of 2024 Australia has a thriving and growing tech sector. According to the latest Australian Startup Ecosystem Report (ASER 2024) the number of tech startups in Australia has grown 25% over the last 3 years and Sydney and Melbourne are emerging as major tech hubs in the Asia-Pacific.

Startup businesses often face significant challenges in securing funding due to strict criteria and perceived risks, making it difficult for them to obtain financing from traditional banks.

The report also notes that Australian tech startups raised a record $5.9 billion in venture capital in 2023, up 15% from the previous year. But while these numbers are impressive many startups still can’t get the funding they need to scale and compete globally. That’s where alternative funding options like venture debt come in to complement traditional funding sources like bank loans and equity financing.

What is Venture Debt?

Venture debt is debt financing for venture backed companies. Unlike traditional loans venture debt is available to startups that have already raised venture capital but need more funds to extend their runway, fund specific projects or bridge the gap to their next equity round.

In Australia venture debt has grown in popularity over the last 5 years. Major players in the Australian venture debt market include Xero Capital, OneVentures and Leap Capital. These firms have collectively deployed over AUD 500 million in venture debt to Australian startups since 2020 according to the Australian Venture Capital and Private Equity Association (AVCAL) 2024 Yearbook.

The terms of venture debt can vary but typically include:

• Loan amounts from $1 million to $20 million

• 3-4 year terms

• 10-15% per annum interest

• Warrants or equity kickers giving the lender the right to purchase equity at a future date

One of the benefits of venture debt is it’s less dilutive than equity financing. For a fast growing tech startup this means you can preserve equity for future rounds or employee stock options.

Bank Loans for Tech Start Up Business Loans

On the other hand we have traditional bank loans. In Australia the major banks like Commonwealth Bank, ANZ and Westpac offer various loan products for businesses including some tailored for startups. These loans have lower interest rates than venture debt but often require collateral or personal guarantees. A detailed business plan is crucial in securing a bank loan, as it should include financial details such as expenses, revenue projections, and forecasts to make a compelling case to potential investors and lenders.

Bank loans for startups in Australia fall into these categories:

• Term loans: Fixed amount loans with regular repayments over a set period

• Lines of credit: Flexible borrowing up to a certain limit

• Equipment finance: Loans for purchasing business equipment

• Invoice financing: Loans based on outstanding customer invoices

However, traditional bank loans can be tough for early stage startups to get. Banks require a solid credit history, consistent revenue and often profitability – criteria many young tech companies struggle to meet. A good personal credit history is also a requirement for obtaining traditional bank loans.

A secured business loan is another option, but it involves risks such as the potential loss of personal assets, like property, if the business fails to repay the loan.

Securing a startup business loan can be challenging due to the unique financial needs of startups and the specific requirements needed to qualify.

Venture Debt vs. Bank Loans: Key Comparisons and Interest Rate

Now let’s compare these two options across several key dimensions:

Accessibility and Eligibility

Venture debt is more accessible to tech startups especially those that have already raised venture capital. In my experience venture debt providers in Australia are primarily concerned with the startup’s growth potential and the quality of their existing investors.

Bank loans on the other hand focus on traditional metrics like credit history, revenue and profitability. According to the Reserve Bank of Australia’s 2024 Small Business Finance Advisory Panel only 35% of tech startups that applied for bank loans in the last year were approved. Startups often face challenges when applying for startup loans due to their lack of established credit history, but these loans can be more accessible with options like microloans and government-backed loans.

Funding Amounts and Scalability

Venture debt offers larger funding amounts that can scale with the company. I’ve seen Australian startups get venture debt facilities of up to AUD 50 million in the later stages of growth.

Bank loans for startups especially those without significant assets or revenue are smaller. The average bank loan to Australian tech startups in 2023 was AUD 350,000 according to the Australian Banking Association’s Small Business Lending Report 2024.

Interest Rates and Cost of Capital

Here bank loans have a clear advantage. Current interest rates for business loans from major Australian banks are 5-8% per annum whereas venture debt is 10-15% per annum.

But you need to consider the total cost of capital. Venture debt is more expensive in terms of interest but doesn’t dilute equity. For a high growth startup the cost of equity dilution can far outweigh the higher interest rates of venture debt.

Repayment Terms and Flexibility

Venture debt often has more flexible repayment terms. Many venture debt providers in Australia offer interest only periods of up to 12 months so startups can conserve cash in the short term.

Bank loans require immediate commencement of principal and interest repayments. However some government backed schemes like the SME Recovery Loan Scheme offer repayment holidays of up to 24 months.

Impact on Equity and Ownership

This is the biggest difference between the two. Venture debt has minimal impact on equity apart from the potential dilution from warrants. Bank loans have no impact on equity at all.

However the indirect impact can be huge. A startup that takes on bank debt may need to raise equity at a lower valuation if they struggle to meet their repayment obligations. Venture debt being more aligned with the startup growth model can actually help a company increase their valuation before the next equity round.

Venture Debt for Tech Startups

In my years working withing Australian tech startups I’ve seen venture debt play a big role in scaling businesses. Here are the advantages:

Less dilutive than equity financing

• This is especially important for founders and early employees who want to maintain significant ownership.

Available to pre-profit companies

• Unlike most bank loans venture debt is available to startups that are still in growth phase and not yet profitable.

Larger funding amounts

• As mentioned earlier venture debt facilities can go up to $50 million for later stage startups.

Strategic partnerships and networking opportunities

• Many venture debt providers in Australia like OneVentures also operate venture capital funds. This can open doors to valuable networks and potential future investors.

A great example of venture debt in action in Australia is Canva, the graphic design platform. In 2020 Canva secured a $200 million venture debt facility alongside its Series F equity round. This allowed the company to scale without excessive dilution and is now valued at over $40 billion.

Advantages of Bank Loans

While hard to get, bank loans have some advantages for tech startups:

Lower interest rates

As mentioned bank loans have interest rates 5-7 percentage points lower than venture debt. Bank loans can also be beneficial for small business owners, providing them with the necessary capital to grow their businesses.

No equity dilution

Bank loans don’t dilute ownership at all which can be attractive for founders who have already gone through several equity rounds. Additionally, unsecured business loans, although carrying higher interest rates of 15-20% per annum, offer quicker processing times compared to secured loans.

Building a banking relationship

Repaying a bank loan can open up larger loans and other banking services as the company grows.

An example of a tech startup that used bank loans is Afterpay (now Block). In its early days Afterpay secured a $20 million loan facility from NAB which was critical in funding their receivables and scaling their growth.

Risks and Considerations: Credit Score

Both options have their own set of risks:

• Venture debt risks include higher interest rates and fees and more aggressive collection practices if the company struggles. The debt can also come due before the company is ready for the next equity round.

• Bank loan risks are mainly around strict eligibility criteria and potential requirements for personal guarantees or collateral. This can put founders personal assets at risk if the business fails.

For both options startups need to consider the impact on cash flow and future funding rounds. Too much debt can make a company less attractive to future equity investors.

Which one to choose?

Choosing between venture debt and a bank loan depends on your startup’s situation. Here:

Stage and needs: Early stage startups with high growth but low revenue might be more suited to venture debt, while more established startups with steady revenue might be better off with bank loans.

Future growth projections: If you’re expecting rapid growth and multiple funding rounds in the future venture debt might be more aligned with your path.

Cap table and control: How much equity are you willing to give up (indirectly through warrants) versus keeping full ownership with a bank loan.

Risk tolerance: How much can you commit to regular repayments (more critical for bank loans) versus larger but more flexible repayments (typical of venture debt).

Application Process: Detailed Business Plan

For a venture debt application you’ll need to prepare:

• A solid pitch deck with your growth metrics and future projections

• Details of your current investors and cap table

• Financial statements and cash flow projections

• A strong business idea can help in securing financing through both venture debt and bank loans

For bank loans you’ll need:

• A full business plan

• At least two years of financial statements

• Collateral or security you can offer

• Personal financial information for company directors

Nadine Connell, Co Founder of Smart Business Plans says, “While venture debt continues to be a great tool for startups, we are seeing growing interest in more traditional bank loans where the eligibility criteria is manageable, largely due to the more favourable interest rates.”

So, which will it be?

Choosing between venture debt and bank loans is not always black and white for Australian tech startups. Both have their time and place in a startup’s funding journey.

Venture debt can provide a lot of capital with minimal dilution, it’s great for high growth startups with strong VC backing. It’s perfect for extending runway between equity rounds or funding specific growth initiatives.

Bank loans are harder to get for early stage startups but offer lower interest rates and are good for more established startups with steady revenue. They’re also great for building long term banking relationships.

Ultimately it’s dependent on your startup’s situation, growth path and financial needs. As always, book a meeting with our expert business lending team if you’d like to see if you’d qualify for a start up business loan.