What type of debt is available to venture backed companies?

Like all companies, early-stage venture-backed companies often require debt to augment their capital structure. Similar to other forms of private credit, venture debt may be issued as bank debt or non-bank private debt from financial sponsors or credit investors. Venture debt primarily serves one purpose: extending a startup’s capital runway without diluting equity holders. Lenders provide debt facilities (e.g., term loans, RLOCs/FLOCs) to PE- or VC-backed startups. These lenders provide non-dilutive capital to extend the runway and support working capital needs. 

Venture debt terms tend to follow a pattern. Most commonly, twelve to twenty-four months of interest-only payments, with amortization after that duration. Occasionally, terms include the issue of warrants to the lender. These warrant options can range from 5–100 basis points of equity or more, depending on various factors. Lenders may offer facilities with limited covenants but often include triggers tied to remaining cash runway or revenue/ARR declines. Pricing can sit above traditional bank debt for more mature, cash flow-positive companies, but below what a down-round would cost in dilution to existing shareholders. 

Lenders often weigh several factors, including sponsor reputation(s) and history of portfolio support, funding history, founding story, industry/TAM, product–market fit, and leadership team, among others, as part of the underwriting process. 

 Startups can use venture debt to delay the next round, bridge to profitability, or fund capex, hiring, or acquisitions. Used correctly, it’s a strategic tool for the startup.