This bank-based lending source - although limited to a small group of qualifying companies and usually geographically concentrated in California and the Boston area - has significant benefits for qualifying companies. This arrangement allows companies with previous backing from venture capital companies that have established relationships with certain banks to access bank lending based primarily on the bank's reliance on the due diligence done by the previous venture capital firms.
The benefits of these loans to borrowers are access to bank lenders previously unavailable to the company, quicker access due to the pre-screening by the venture capital firm and access to bank financing with a higher risk threshold than a stand-alone bank loan.
This bank lending comes with a high interest rate and probable future stock warrant coverage requirements, which allows the lender to purchase shares in the borrowing company at a future date at a specified fixed price or a price under current market price at the time of purchase. It is also currently limited to a small percentage of borrowers. (For more on how venture capitalists operate, read Cashing In On The Venture Capital Cycle.)
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