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Venture Debt Basics

What Are The Venture Debt Basics?

Venture debt is a loan provided to high-growth, typically venture-backed companies to fund further growth without requiring founders to give up additional ownership. It is typically repaid through future equity raises or growing cash flows and is commonly used to extend cash runway between funding rounds.

Venture Debt Key Facts

• Used by: Venture-backed growth companies

• Typical stage: Series A onwards

• Purpose: Extend runway and reduce dilution

• Loan size: 20%–30% of last equity round (typical)

• Interest rate: 10%–15% all-in

• Repayment: Interest-only period followed by amortisation and final repayment

• Equity participation: Often includes warrants

What Is Venture Debt?

Venture debt is a type of loan provided to high-growth, venture-backed businesses that are typically not yet profitable but have strong revenue growth and backing from venture capital investors.

Unlike traditional bank lending, venture debt lenders rely primarily on the company’s future equity funding or growing cash flows for repayment, rather than existing profitability or asset coverage.

Venture debt allows businesses to extend their cash runway, accelerate growth, and delay or reduce equity raises, helping founders and investors minimise dilution. This allows founders to retain more ownership while still accessing growth capital.

What Is The Difference Between Venture Debt & Venture Capital?

Venture capital and venture debt are complementary funding tools, but they serve different purposes and have different implications for founders.

What Is The Difference Between Ownership & Dilution?

Venture capital involves selling shares in the business in exchange for investment. This permanently dilutes existing shareholders. Venture debt, by contrast, is a loan that must be repaid and therefore results in significantly less dilution.

Warrants are typically modest and represent a small fraction of the dilution associated with an equity round. Used effectively, venture debt can materially reduce dilution over the life of a business by reducing the amount of equity that must be issued to fund growth.

Can You Explain Purpose & Timing?

While venture debt carries interest, it is often a lower long-term cost of capital than equity. Equity investors typically expect returns of 20%–30% per annum or more, whereas venture debt interest rates are typically 10%–15% per annum.

What Is The Difference Between Control & Governance?

Equity investors often require board seats, voting rights, and approval over key strategic decisions. Venture debt providers do not typically take board seats or operational control, allowing founders and existing investors to retain greater control of the business.

What Is The Cost Of capital?

Venture capital is typically used to fund major growth phases and product development. Venture debt is often used alongside venture capital to extend runway, accelerate growth, and delay equity raises until the business reaches a higher valuation.

Venture debt is rarely a replacement for venture capital. Instead, it is commonly used between equity rounds to extend cash runway and reduce dilution, allowing founders to raise equity less frequently and on more favourable terms.

How Are Purpose & Timing Used Together?

What Is Venture Debt Used For?

What Is The Typical structure Of Venture Debt?

Venture debt is primarily used to extend cash runway and support business growth. Common uses include:

• Bridging to the next equity funding round

• Delaying an equity raise to achieve a higher valuation and reduce dilution

• Supporting sales and marketing expansion

• Investing in product development and infrastructure

• Providing working capital to support growth

In some cases, venture debt allows a business to reach profitability without raising additional equity.

The fundamental objective is to provide growth capital while allowing founders and existing investors to retain more ownership of the business.

Venture debt facilities have several defining characteristics:
Loan size

Facilities are typically structured relative to the company’s scale and funding history, commonly including:

• Up to 20%–30% of the most recent equity round

• Up to approximately 1x annual recurring revenue (ARR)

• Or based on total equity backing and available cash runway

How Are Facilities Secured?

What Is the Repayment Profile?

Facilities are normally secured via a fixed and floating charge over the company’s assets. This often includes intellectual property, although lenders do not typically rely on asset realisation as the primary repayment source.

Venture debt commonly includes:

• An initial interest-only period of 12–24 months

• Partial amortisation thereafter

• A final repayment (sometimes referred to as a bullet repayment) at maturity

This final repayment is often expected to be funded through a future equity raise, refinancing, or operating cash flows.

This structure allows businesses to access capital today without requiring immediate full repayment from operating cash flow.

What Interest Rates Can We Expect?

Interest rates typically range from approximately 10% to 15% per annum on an all-in basis, reflecting the higher risk profile relative to traditional bank lending.

What Are Warrants?

Lenders often receive warrants, which provide the option to acquire a small equity stake in the business. This equity participation is modest relative to a full equity round and aligns the lender with the company’s growth.

Which Businesses Use Venture Debt?

Venture debt is typically used by venture-backed businesses from Series A onwards, although it can also be used earlier or by later-stage scale-ups.

These businesses usually have:

• Strong revenue growth, often exceeding 20% annually

• Recurring or predictable revenues, particularly ARR

• Institutional venture capital investors

• A clear path to profitability or their next funding round

• A scalable product with proven market demand

These companies are often currently cash-consumptive but have a defined trajectory towards cashflow breakeven, typically within 12 to 36 months.

This makes venture debt particularly attractive for founders seeking to scale efficiently while preserving ownership.

When Should A Company Consider Venture Debt?

Many businesses that qualify for venture debt do not know it exists. A 2024 analysis by the ScaleUp Institute identified that only 2% of scale-up businesses are utilising venture debt.

It should be considered as an option for businesses that:

• Have growing recurring or predictable revenue

• Have raised venture capital, plan to do so or can do so

• Own their own IP

• Are seeking to extend runway without issuing additional equity

• Anticipate meaningful valuation growth before their next funding round

• Have a clear plan to reach profitability

• Want to reduce dilution and retain greater ownership

Venture debt is most effective when used proactively, prior to increasing investment spend, while the business still has strong cash reserves. However, reactive situations where cash is drying up and/or investment has already been deployed are often still fundable where the business still has investor support.

Does Venture Debt Require Profitability?

One of the most attractive aspects of venture debt is that it does not require profitability. Indeed, it’s core purpose is to allow a business that is not yet profitable to continue to pursue profitability without requiring founders to give up additional equity.

However, there is also a use case for currently profitable businesses to use venture debt for business expansion where the costs of said expansion are likely to reduce cashflows and/or cause negative net cashflow for a period and where other funding routes are not appropriate/available.

Is Venture Debt Expensive?

Venture debt is not a particularly expensive product relative to the risk undertaken by lenders.

The majority of lenders in the wider market will only lend where there is tangible security. A sub-set of lenders will lend where there is no tangible security but where strong cashflows are present.

A venture debt lender can rely on neither of these things. This makes it some of the highest risk lending in the market.

Regardless, I have seen venture debt facilities priced as low as 6% over Base.

Pricing is typically as follows:

• Interest – Between 10% and 15% all-in.

• Fees – Anticipate c. 1.5% upfront and 1.5%-2% at expiry.

• Warrants – Typically 0.5%-1% of the value of the business.

• Clients should typically expect to cover the lenders legal costs when producing loan documentation.

How Is Venture Debt Assessed?

Venture debt lenders typically assess businesses based on:

• Annual recurring revenue (ARR) and revenue growth

• Equity backing and investor quality

• Cash runway and capital efficiency

• Likelihood of future equity funding

• Overall growth trajectory and scalability

For this reason, venture debt is sometimes referred to as ARR lending or venture lending, although structures vary between lenders.

How Is Venture Debt Assessed?

Venture debt is provided by specialist lenders that focus on high-growth, often venture-backed businesses. These lenders understand that such businesses are typically not yet profitable but have strong growth potential and institutional investor backing.

The main provider categories include:

Specialist venture debt funds

These funds focus exclusively on lending to venture-backed businesses. They are typically the most active providers and offer the most flexible structures. They are comfortable lending based on growth trajectory, ARR, and investor backing.

Venture-focused banks

Some banks have dedicated venture lending teams focused on supporting venture-backed companies. They can provide venture debt alongside banking services such as operating accounts and foreign exchange.

Growth and technology lenders

Some private credit funds and growth lenders provide venture debt as part of a broader strategy of lending to high-growth technology and life sciences companies.

Hybrid venture capital and debt funds

Some venture capital funds also provide venture debt to their portfolio companies or the wider market.

Each lender has different appetite, structures, and pricing. Identifying the right lender can materially improve terms, increase facility size, and improve execution certainty.

Access to the right lender can materially improve terms and reduce dilution over time.

How Do I Support With Venture Debt?

I support founders, management teams and investors in navigating venture debt funding processes. This includes reviewing structural considerations, engaging lenders active in the relevant segment, preparing materials and coordinating the process through documentation and close.

Working with the right lenders and structuring the facility correctly can materially improve terms, increase facility size, and reduce dilution over time.

If you would like to discuss whether venture debt could be considered for your business, I would be happy to discuss your situation.