Answer

What is venture debt?

Updated August 2026. Evergreen page — refreshed in place as facts change.

Banks don't lend to pre-profit startups on fundamentals — venture debt exists because a specific class of lender will, using your cap table as the credit signal. Used well, it's the cheapest runway you'll ever add. Used late, it's an anchor with covenants.

How the product works

A venture lender extends a term loan or line shortly after an equity round — the credit logic being that your investors' diligence and follow-on capacity de-risk the loan. Standard shape: principal at 25–35% of the round, three-to-four-year term with an interest-only period, pricing several points above prime, plus warrants (rights to buy a small slice of equity, commonly well under 1%) as the lender's upside kicker.

Lenders are specialized banks and dedicated debt funds. The category absorbed a shock when Silicon Valley Bank — its historic anchor — failed in March 2023, but the product itself persisted and the lender roster rebuilt around banks and funds alike.

The good use: cheap runway at strength

The canonical play: raise the facility alongside or just after an equity round — when you qualify best and need it least — and hold it as extension. Three to six extra months of runway can mean hitting the next round's metrics instead of raising short of them, and the all-in cost (interest plus tiny warrant dilution) is far below selling more equity at today's price.

The arithmetic favor grows with conviction: if you believe the next round prices meaningfully up, debt-funded months are the cheapest months on your roadmap.

The bad use: a bridge to nowhere

Venture debt punishes desperation. Facilities carry covenants (minimum cash, sometimes performance triggers) and MAC clauses lenders can act on when things wobble — precisely when you'd need forbearance. Drawing debt to substitute for a round you can't raise converts an equity problem into a default problem with a repayment schedule.

Rules of thumb the good CFOs use: never let debt service consume runway you'd need to reach real milestones, never draw simply because the line exists, and read the covenants as the lender's rights in your worst quarter — because that's when they'll matter.

Debt vs equity vs the newer instruments

Against another equity round, debt trades dilution for obligation — right when milestones are near, wrong when they're far. Against revenue-based financing and receivables facilities (which underwrite actual cash flows), venture debt underwrites your backers — available earlier, but tied to VC momentum. Many later-stage startups layer both worlds as their revenue becomes bankable on its own.