Venture debt is an excellent way to complement your raised equity. This type of loan is designed specifically for early-stage companies and businesses backed by venture capital.

A strategic tool to complement equity financing, venture lending can provide your startup or small company with short-term and long-term capital. It can also allow you to structure and price a loan to better align with your particular circumstances. That’s why the terms and availability of your venture debt will depend on your company’s scale, the raised equity, and your business goals and objectives.

When used correctly, venture debt can help your business minimize equity dilution, extend the runway between rounds, finance working capital and investments, improve your fundraising process, and create a solid credit track record at an early stage.

The difference between equity and venture debt

Venture debt doesn’t replace equity; it follows it. Many companies raise venture debt in their early stage, using their last round of equity financing to describe performance objectives and strategies when asking for a new loan. Without venture capital investors, you’re less likely to be able to secure venture debt lenders.

Most equity financing does not require you to repay it. A lender can assume some sort of liquidity, and you might negotiate some redemption rights, but equity is considered long-term capital. Because of its flexible nature, it can also be quite hard to restructure, so it’s generally used to fund any legitimate business purpose. Venture lending and debt, on the other hand, can provide your company with both short-term and long-term capital, but it’s usually tied to a particular strategy.

The use and utility of venture debt are, in short, more defined. You have a set of business objectives, and the debt allows you to improve your circumstances and work towards that goal. The ultimate aim of venture debt is to raise capital and prioritise growth – not profitability.

Why choose venture lending over traditional debt financing

Many businesses will opt for more traditional debt financing options, such as cash-flow-based term loans or lines of credit based on assets. However, these usually require you to generate a positive cash flow before they can receive a venture debt loan. The main issue is that if you shun venture capital investors, you won’t have access to raise venture debt in the future – because venture debt lenders tend to only support companies that already have venture backing.

Another advantage of venture debt compared to conventional debt financing methods is that most venture lenders and venture debt deals doesn’t require any collateral. Most early-stage companies don’t have substantial assets, so compensations and interest payments are instead given in the form of warrants on common equity.

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Who can apply for venture debt, and how does it work?

Venture debt is usually available to startups that have completed a few rounds of venture capital investing. This type of debt is better suited for companies with a history of operations but without a positive cash flow that would allow them to access conventional loans.

There are some significant differences between venture debt and traditional loans. The first is that debt is short-to-medium-term, between three and four years on average. Also, the primary debt is determined using the last equity round that was raised, and the amount is usually around 30% of those funds.

Most venture debt lender and venture debt firms involve interest payments when working with venture debt deals. Most venture debt lenders can also receive warrants on common equity as part of the compensation. The value tends to represent, on average, between 5% to 20% of the loan amount. These warrants can usually be converted later into shares using the price of the last round of equity financing.

Another advantage of venture debt is that loans tend to be priced individually and based on your particular circumstances. For example, if you are at an earlier stage with your startup, you will usually have to pay a higher rate.

The cost of venture debt

Typically, venture debt includes three elements:

  • A fee that is made up of 1% to 2% of the approved loan amount
  • An annual interest rate of about 10% to 12%
  • An equity kicker that should be worth between 10% to 20% of the loan (and can be converted into a small portion of equity later).

Many borrowers choose an interest-only period (usually lasting between 6 and 12 months) to get started. Repayments can also be made in both interest and equity capital.

Venture debt is, in appearance, more expensive than traditional bank financing. However, it can prove SMEs with non-dilutive capital can use it to grow their business. Raising venture debt is also available faster.

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How to use venture debt

Because venture debt does not require ratio-testing, covenants, or fixed criteria, you can use the capital in several flexible ways. For instance, some of the things you can do with it include:

Providing working capital

If your business hasn’t yet made a profit, it’s essential to be able to control your cash flow and find new opportunities to raise funding and fulfill working capital requirements. For example, if you want to purchase stock. Venture debt is flexible enough to help startups deal with these needs more straightforwardly.

Planning your mergers and acquisitions

An excellent way to expand your fast-growing business is to implement a strategy that focuses on mergers and acquisitions. To do this, however, you require financing, so you can respond to new opportunities as they arise. Once you secure the debt, you can then draw it down over time.

Extending your cash runway

A typical venture debt lender focuses on the value and business model of a company, rather than how well it has performed financially in the past. You don’t need to show you can already make a profit to secure venture debt, although it’s best to already be generating some revenue. As you close on profitability, venture debt can help your loss-making company have some headroom.

Supporting your business expenditure

You need to be able to fund specific investments to continue growing your business. For instance, to purchase software licenses and new equipment. With venture debt, you can finance these needs and plan for future investments as well.

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Are you ready for venture debt?

There are a few considerations to keep in mind before you contact the right venture debt lender or venture capital firm to discuss your financing options. For instance:

  • It’s best if you are a SME
  • You should generate at least 50% of your revenue from the country from which you operate.
  • Your startup should be in one of the following sectors: Fintech, SaaS, software, internet, IT services, telecommunications, life sciences, machine learning, healthcare, business services, or cleantech.
  • You should have a proven business model with a functioning product and an established customer base (ideally, in the B2B arena).

Preparation is key, so make sure you have all relevant information at hand before you start meeting with venture debt providers. You will need all your financial information, a company profile, market analysis, funding needs, and business goals.

Recommended steps to raise venture debt

First of all, you should collate your finances. Gather your forecasts for the next couple of years, organise your recent management accounts, and create a capitalisation table. Then, compile a detailed company profile that includes your business history, how much funding you have raised to date, and your ownership model.

The next step is to explain your business model in detail. What do you do that is special, and what problems is your startup able to solve? State your unique selling points, explain your customer profile, and include your routes to market. Make sure you also mention the size and maturity of your industry, the key trends, and any competitors in the sector. Don’t forget to also describe your management mean, their roles, backgrounds, and responsibilities.

Lastly, when you’re raising venture debt, it’s time to outline your funding needs and ambitions. How much money do you require for your venture debt financing, where and when will you invest it, and what can this growth capital help you achieve? List also your downside scenario planning, cost efficiencies, assets that can be sold, and whether a third party would buy. And finally, include the exit routes that you find the most attractive.


Do you need help raising venture debt or dealing with equity financing? Fundsquire offers simple, quick non-dilutive funding so you can reinvest in your company’s growth and accelerate without losing any equity. Contact us today to learn more about our different funding solutions tailored to the stage of growth your business is in.

Looking for funding?

We can help. Fundsquire has funding solutions for every step of your growth journey.

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