How does venture lending work?

Venture lending has several key characteristics that companies need to consider in advance.

Term loan or credit line

In venture lending, loans are typically structured as term loans or lines of credit.

Term loans provide a large amount of capital upfront, which the startup repays over a set period with interest. This provides predictability but locks the company into the loan for several years and causes overfunding due to capital which isn’t deployed.

A credit line, on the other hand, offers a revolving credit facility that startups can draw from as needed. It is a more flexible funding approach. Companies avoid overfunding and thus unnecessary cost of capital. 

Venture lending fuels growth

Venture lending is especially relevant for startups and early-stage companies that want to grow their business. Since those growth initiatives are capital-intensive, companies need additional cash. However, they don’t want to sell shares to get funding and thus dilute their ownership further. 

Filling the gap between equity rounds

Venture lending typically follows venture capital – it's somewhat of an unwritten rule. Companies pursuing such a high-risk loan often have prior equity funding from a VC investor.

Venture lending serves as a bridge between two VC funding rounds, allowing companies to fill the gap without relinquishing excessive shares.

Repayment terms

Venture lending is typically repaid within 18 months to 3 years, often from the proceeds of the next equity financing round.

It can be non-dilutive

Venture lending is often described as non-dilutive compared to VCs because it doesn't involve the issuance of new shares, which would dilute existing shareholders' ownership stakes in the company.

However, venture lending is not fully non-dilutive due to equity warrants and convertible debt which might be part of the venture lending agreement.

Visible costs: high-interest rates

Venture lending typically comes with higher interest rates and fees compared to traditional bank loans. Since venture lenders assume higher risks by lending to early-stage startups with limited operating histories, they often charge higher interest rates to compensate for this risk (up to 25%). 

Hidden costs: warrants and covenants

Venture lending may include equity warrants (options to buy shares), which can dilute ownership and increase the overall cost of capital. Additionally, they can increase complexity and add uncertainty to the capital structure. 

Venture lending agreements often include financial covenants that require startups to meet certain performance metrics, such as revenue targets.

Failing to meet these covenants can trigger default provisions and lead to penalties, increased interest rates, or even the acceleration of repayment obligations.

Be aware of potential overleveraging

Taking on debt can increase a startup's financial leverage, making it more vulnerable to financial distress if the business encounters challenges or experiences a downturn. 

If a company is unable to generate sufficient cash flow to meet its debt obligations, it may face liquidity problems. Therefore, young businesses must carefully assess their ability to service debt and avoid overleveraging their balance sheets.

Venture lending for companies

Venture lending has emerged as a compelling alternative for startups seeking capital between VC rounds. While it avoids ownership dilution, venture lending comes with its own set of considerations. 

Higher interest rates, potential equity warrants, and stricter financial covenants can impact a company's financial health and cash balance. However, careful planning and measured use can fuel strategic growth without sacrificing ownership control. 

Ultimately, venture lending presents a valuable tool for startups to navigate the funding landscape, but it requires a thoughtful approach to manage the associated risks.

Summary: Venture lending

Venture lending, also known as venture debt, offers startups a non-dilutive alternative to equity financing, especially useful between VC rounds.

Unlike traditional bank loans, these funds come from specialized lenders and often require little collateral. The structure can vary between term loans (with predictable repayments) and revolving credit lines (offering more flexibility).

While this allows startups to fuel growth without giving up more ownership, venture lending is not entirely dilution-free due to common use of equity warrants and convertible features.

However, the benefits come with trade-offs:

• Venture debt typically carries high interest rates, sometimes up to 25%, and includes financial covenants that can trigger penalties if missed.
• Startups must be cautious of overleveraging, as debt repayments can strain liquidity if revenue projections don’t materialize.

Used wisely, though, venture lending can be a powerful financial tool to extend runway and scale operations without sacrificing strategic control.

Q&A: Venture lending

Q&A: Venture Lending

What is venture lending, and how is it different from a bank loan or VC equity?

Venture lending is a loan tailored for VC-backed startups to extend runway between equity rounds with less dilution than raising more equity. Unlike traditional bank loans that rely on cash-flow or hard collateral, venture lenders underwrite to growth, investor backing, and milestones; unlike equity, it must be repaid and usually comes with covenants and an "equity kicker" (warrants).

When does venture lending make the most sense?

Two classic use cases: (1) extend runway 6–12 months to hit a value-defining milestone; (2) finance working capital or capex when growth is strong but equity is costly. Post-raise "sidecar" lines are common right after a priced round to reduce dilution while momentum is good.

How much should I raise?

A common anchor is ~20-40% of the last equity round size, sized to a specific milestone with room for covenant headroom. Raising "just because" increases cash drag and covenant risk. Lenders and operators warn that oversizing the line is one of the most common (and expensive) mistakes.

What will it cost me (all-in)?

Headline interest is only part of it. Budget for: interest rate, origination & facility fees, end-of-term fees, warrants, and covenants’ operational cost. Operator guides peg typical recent interest ranges and emphasize modeling total cost, including potential warrant dilution, rather than fixating on APR.

Warrants: what’s "market"? How much dilution should I expect?

Non-bank lenders often ask for warrants. Industry guides commonly cite 5–10% warrant coverage of the loan amount with ~10-year terms; some bank/strategic programs can be lower, some growth/venture credit funds higher depending on risk. Practically, outcome dilution can land around low bps of FD shares but varies widely – model it.

What covenants should I expect, and which ones are founder-unfriendly?

Expect reporting, minimum liquidity ("cash covenant"), and negative covenants (no new debt, no big acquisitions, no dividend, etc.). Founder-unfriendly patterns include “hair-trigger” MAC clauses, monthly EBITDA thresholds for still-burning companies, aggressive material adverse change definitions, and tight revenue covenants. Avoid cross-defaults that chain to other facilities.

What happens if I trip a covenant or miss a payment?

Default accelerates the loan; lenders can restrict draws, increase pricing, or enforce security interests. Practitioners note lenders can shift very quickly from “partner” to “protect principal,” so proactive communication and early waivers matter.

What collateral and security do lenders usually require?

All-assets lien is common; some lenders also include IP liens (or springing liens). Watch intercreditor agreements if you have an existing revolver/ARR line.

How do I compare term sheets apples-to-apples? A quick checklist

• Cost stack: interest, OID/origination, end-of-term/exit fee, unused line fee, prepayment penalty.
• Equity kicker: warrant coverage %, strike price basis, term, net-exercise, anti-dilution mechanics.
• Structure: draw schedule, interest-only period, amortization start, maturity.
• Covenants: financial (liquidity runway tests), negative (no additional debt), reporting cadence, MAC.
• Security: all-assets vs carve-outs; IP lien yes/no; intercreditor.
• Flexibility: prepay soft/hard call; ability to tap M&A, venture lines, or ARR lines in parallel.

Use this to build a simple comparison model; many lenders and law-firm resources publish "market" datapoints to benchmark.

What are the biggest avoidable mistakes?

1. Oversizing the line
2. Under-modeling warrants/fees
3. Accepting EBITDA covenants that don’t fit your stage
4. Drawing too early and paying months of cash drag
5. Not syncing lender rights with your next equity round