7 alternatives to venture debt

1. Revenue-based financing: debt that moves with your business

Bottom line: You get upfront capital, then repay it as a percentage of your future revenue until a pre-agreed cap is reached. No fixed payment schedule, no covenants, no warrants.

How it works

• You raise, say, €500K.
• You agree to repay 6-10% of monthly revenue.
• Repayments continue until you hit a cap, for example 1.4-1.8x the original amount.

If revenue grows faster than expected, you repay faster. If revenue slows, your payments shrink proportionally. This removes the covenant pressure that makes venture debt dangerous in volatile periods.

Global revenue-based financing is growing rapidly, with the market expected to exceed roughly $68B in 2029.

When it makes sense

• You have predictable, recurring revenue but do not want the rigidity of venture debt.
• Your gross margins are strong enough to afford revenue share payments.
• You want to fund growth marketing or sales hiring without fixed debt service obligations.

Pros

• Completely non-dilutive, no warrants.
• No covenants on cash balance or revenue milestones.
• Repayments flex automatically with performance, reducing default risk.

Cons

• Effective cost of capital can be higher than venture debt if you grow very fast.
• Not ideal if your revenue is seasonal or has deep volatility.

If you are new to RBF, re:cap's guide to revenue-based financing is a helpful resource.

2. Flexible credit line: maximum flexibility, minimal commitment

Bottom line: A flexible credit line is like a corporate overdraft. You get a limit, draw when needed, and pay interest only on what you use. No fixed repayment schedule, no equity.

How it works

• Lender sets a limit, typically X% of the annual recurring revenue or tied to receivables.
• You draw money when you need it: hiring, growth opportunities, bridge financing
• Interest accrues only on drawn amounts.

Unlike venture debt, which delivers a lump sum with a fixed maturity, revolving credit gives you ongoing access to liquidity as your business needs it.

When it makes sense

• Your business is healthy but cash flow timing is unpredictable.
• You have large upfront costs but revenue arrives later.
• You need an "always-on" buffer without the commitment of a full term loan.

Pros

• Maximum flexibility: draw and repay as needed.
• You only pay for capital when you actually use it.
• No equity warrants or restrictive covenants in most cases.

Cons

• There may be standby or commitment fees even if you do not draw.
• Interest rates can be higher than venture debt term loans.

3. Convertible loans: bridge with equity optionality

Bottom line: A convertible loan is debt that converts into equity at a future financing round or maturity date. It functions as a loan with interest payments until conversion, giving lenders downside protection and equity upside.

How it works

• You borrow capital with a fixed interest rate and maturity (typically 12-36 months).
• At the next priced equity round, the loan converts to equity at a discount to the new valuation (often 15–25%).
• If no conversion event occurs by maturity, the loan can be repaid in cash or converted at a predetermined valuation cap.

Convertible loans are common in Europe and offer more flexibility than pure venture debt because they defer the valuation discussion and reduce immediate dilution.

When it makes sense

• You need bridge capital between equity rounds.
• You want debt-like protection but are willing to offer equity upside.
• Investors believe in your next milestone but want conversion optionality.

Pros

• Lower interest rates than pure debt because of the equity conversion feature.
• Delays valuation negotiation until the next round.
• Debt-like downside protection with equity-like upside for investors.

Cons

• Still results in dilution when conversion occurs.
• If you do not raise another round, you may face a cash repayment obligation.
• Complex cap table implications if multiple convertible instruments stack up.

4. Leasing: finance equipment without capital expenditure

Bottom line: Leasing allows you to use equipment, hardware, or infrastructure without purchasing it outright. You make regular lease payments, and at the end of the term, you can purchase, return, or renew.

How it works

• Lessor (leasing company) purchases the equipment.
• You make fixed monthly or quarterly lease payments.
• At lease end, you can buy the equipment (finance lease) or return it (operating lease).

Leasing is common for hardware startups, companies with significant IT infrastructure, or businesses that need expensive equipment but want to preserve cash.

When it makes sense

• You need expensive equipment but want to avoid large upfront capital expenditure.
• Equipment has a clear useful life and may need upgrading regularly.
• You want predictable monthly costs instead of lumpy capital purchases.

Pros

• Preserves cash for growth instead of tying it up in equipment purchases.
• Operating leases may offer tax advantages (lease payments as operating expenses).
• Easier to upgrade equipment at lease end rather than selling used assets.

Cons

• Total cost over the lease term is typically higher than purchasing outright.
• You do not own the asset (unless you buy it at term end).
• Early termination can be expensive.

5. Invoice financing and factoring: unlock cash trapped in receivables

Bottom line: If you have outstanding invoices from customers, you can sell them to a lender at a discount (factoring) or borrow against them (invoice financing). This unlocks cash immediately instead of waiting 30-90 days for payment.

How it works

• You issue invoices to customers with payment terms (e.g., net 30, net 60).
• A lender advances you 80–95% of the invoice value immediately.
• When your customer pays, the lender takes their fee and returns the remainder.

This is especially useful for B2B SaaS companies with long payment cycles or enterprise customers who negotiate extended terms.

When it makes sense

• You have significant accounts receivable but need cash now.
• Your customers have strong creditworthiness.
• You want to avoid venture debt covenants or equity dilution.

Pros

• Fast access to cash locked in unpaid invoices.
• No equity dilution, no warrants.
• Flexible: you only factor invoices when you need liquidity.

Cons

• Fees can be high, especially for risky or slow-paying customers.
• Factoring can signal cash flow stress to customers if not managed discreetly.
• Only works if you have significant receivables.

6. Bank loans: traditional debt for stable businesses

Bottom line: Traditional bank loans from commercial lenders offer fixed amounts, fixed interest rates, and fixed repayment schedules. They are the cheapest form of debt but require strong financials and often personal guarantees.

How it works

• Bank underwrites based on balance sheet strength, profitability, and collateral.
• You receive a lump sum and repay it over a fixed term (typically 3-7 years).
• Interest rates are lower than venture debt but covenants can be strict.

Traditional banks are increasingly willing to lend to tech companies, especially those that are profitable or near-profitable with strong unit economics.

When it makes sense

• You are profitable or have a clear path to profitability.
• You have strong balance sheet metrics and predictable cash flows.
• You want the lowest possible cost of capital and can handle covenants.

Pros

• Lowest interest rates among debt options.
• No equity dilution or warrants.
• Builds banking relationships for future credit needs.

Cons

• Strict underwriting requirements: often requires profitability or significant assets.
• May require personal guarantees from founders.
• Covenants can be restrictive, especially around cash balances and debt ratios.
• Approval process is slower than fintech lenders.

7. Mezzanine financing: subordinated debt with equity upside

Bottom line: Mezzanine financing sits between senior debt and equity in the capital stack. It is subordinated debt (repaid after senior lenders) with higher interest rates and often includes warrants or conversion rights.

How it works

• You borrow capital with a higher interest rate than senior debt (often 10–15%).
• Lender receives warrants or conversion rights as compensation for the higher risk.
• In case of default, mezzanine lenders are repaid after senior debt but before equity holders.

Mezzanine financing is common in later-stage companies, growth buyouts, or pre-IPO situations where traditional venture debt capacity is exhausted.

When it makes sense

• You are a later-stage company with strong revenue but need growth capital.
• Senior debt capacity is maxed out but you want to avoid large equity dilution.
• You are preparing for an exit or IPO and need bridge capital.

Pros

• Higher amounts available than typical venture debt.
• Less dilutive than a full equity round.
• Can be structured flexibly with payment-in-kind (PIK) interest options.

Cons

• Higher interest rates than senior debt.
• Includes equity kickers (warrants or conversion), creating some dilution.
• Subordinated position means higher risk and stricter terms.
• Typically only available to larger, later-stage companies.

When does each venture debt alternative make sense?

Use this stage-by-stage view as a sanity check.

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How to qualify for venture debt alternatives

Most non-venture-debt lenders look for similar prerequisites, but with more flexibility on covenants and repayment structure.

Here is what alternative lenders typically want to see:

• Proven Product-Market Fit: You must be scaling an established product with repeatable customer acquisition.
• Minimum revenue threshold: A certain ARR level must be reached. Lower thresholds may apply for invoice financing or customer co-funding.
• Predictable revenue streams: Low churn, diversified customer base, and recurring contracts make you attractive.
• Sufficient runway: At least 6-12 months of cash runway. Alternative lenders want to fund growth, not rescue failing businesses.
• Ability to service payments: Your gross margins and burn rate must show you can comfortably make payments without operational stress.

Unlike venture debt, most alternatives do not require VC backing or impose strict financial covenants. They focus on revenue quality and predictability instead.

How to actually choose: a simple evaluation checklist

Take your top two or three alternatives and score them honestly.

1. Can we model repayments inside our liquidity plan?

If you cannot show how the capital repays within a 12-36 month liquidity plan, you are guessing.

2. What is the true cost of capital?

• For RBF: total cap multiple and expected payback period.
• For revolving credit: interest rate plus standby fees.
• For convertible loans: equity dilution in the case of convertible.
• For hybrid instruments: dilution plus interest or revenue share.

3. What happens in a bad-case scenario?

• Can you still service payments if growth is 50% of plan?
• Does a customer prepayment create dangerous dependency?
• Are there covenants that could trigger default?

4. What does this do to control and flexibility?

• Are there covenants, board seats, or lender approval rights?
• Can you prepay early without penalties?
• Does this structure limit your options for future rounds?

5. What does this signal to future investors and lenders?

• Clean, well-structured non-dilutive funding is usually a positive signal.
• Complex hybrid instruments or high-cost factoring can raise red flags.

10 questions to ask any alternative lender

When comparing offers, drill down into the true cost and operational impact.

1. What is the full cost of capital? (Include interest, fees, and any equity kickers to calculate true APR or factor rate).
2. What covenants or performance triggers apply? (Identify minimum cash, revenue targets, or other requirements).
3. Is there any equity component? (Warrants, conversion rights, or profit participation).
4. How flexible are repayments? (Fixed schedule, revenue-based, or draw/repay flexibility).
5. Can I prepay or refinance early? (Ask about penalties or fees for early exit).
6. What advance rate or credit limit will you provide? (How much of my MRR/ARR or receivables can I access).
7. What is the term length and repayment schedule? (Clarify interest-only periods, balloon payments, or ongoing revenue share).
8. What administrative burden applies? (Reporting frequency, account integrations, or ongoing compliance).
9. How long will funding take? (From term sheet to cash in bank).
10. What is your track record with companies in a downturn? (Ask for references who have navigated slower growth or restructuring).

Conclusion: Alternatives to venture debt

Venture debt has its place, but it is not the only path to non-dilutive growth capital.

By exploring alternatives like revenue-based financing, revolving credit lines, or convertible loans, founders can:

• Avoid covenant risk and maintain operational flexibility.
• Reduce or eliminate equity dilution compared to warrant-heavy venture debt.
• Match capital structure to cash flow reality rather than forcing growth into rigid repayment schedules.

The key is preparation: secure alternative financing when your business is strong, your revenues are predictable, and you have a clear plan to deploy capital for measurable returns. Choose the funding structure that works with your business model, not against it.

Q&A: Alternatives to venture Debt

1. Why do venture debt covenants become problematic when growth slows?

Venture debt typically includes financial covenants like minimum cash balance, revenue milestones, or burn rate limits. These are designed to protect the lender by ensuring the company stays financially healthy.

The problem arises when growth slows unexpectedly. If you breach a covenant, the lender can declare a technical default, demand immediate repayment, or renegotiate terms at higher cost.

Even if the breach does not trigger immediate consequences, it consumes management time and creates negotiating leverage for the lender. This makes venture debt riskier than flexible alternatives during periods of uncertainty.

2. How does revenue-based financing differ from venture debt in terms of default risk?

Venture debt has fixed repayment schedules. If you miss a payment, you are in default, regardless of business performance.

Revenue-based financing automatically adjusts payments to a percentage of monthly revenue. If revenue drops by 50%, your payment drops by 50%. This structure dramatically reduces default risk because repayments flex with performance. You cannot "miss" a payment in the traditional sense, you simply pay less when revenue is lower.

The trade-off is that RBF can have a higher effective cost if you grow very fast, because you repay the principal faster and reach the cap multiple sooner.

3. What makes revolving credit lines more flexible than venture debt?

Venture debt delivers a lump sum upfront with a fixed maturity and repayment schedule. Once you draw the capital, you are committed to servicing it regardless of whether you still need it.

Revolving credit lines let you draw and repay as needed, paying interest only on the drawn amount. This is ideal for businesses with lumpy cash flows or unpredictable timing between expenses and revenue collection. You maintain access to liquidity without committing to a fixed debt service burden.

The trade-off is that revolving lines typically have lower limits and higher interest rates than term loans like venture debt.

4. Can a company combine multiple non-venture-debt instruments?

Yes, and many companies do. This is part of capital stack optimization.

For example, a SaaS company might use:

• Revenue-based financing for growth.
• A revolving credit line for hiring, growth, or bridge funding.
• Leasing for expensive hardware or IT infrastructure.

The key challenge is seniority and security. If multiple lenders have claims on the same assets (like accounts receivable), agreements must clearly define priority in case of default. Most lenders require a security agreement or lien, and conflicts arise when companies over-leverage without proper structuring.

5. Why is customer co-funding often underutilized by SaaS companies?

Many founders assume customers will not prepay or co-fund product development. In reality, enterprise customers with urgent needs are often willing to:

• Prepay annual contracts for a discount.
• Fund custom features or modules that solve their specific problems.
• Sign multi-year commitments in exchange for pricing guarantees.

The reason this is underutilized is twofold:

1. Sales teams are not trained to ask. They default to standard pricing and payment terms.
2. Founders fear it signals weakness. In reality, strategic customers view co-funding as partnership, not desperation.

The risk is concentration: over-reliance on one or two large customers can skew your roadmap and increase churn risk if those customers leave.

6. What are the tax and accounting implications of hybrid equity-debt instruments?

Hybrid instruments can be complex from a tax and accounting perspective because they blur the line between debt and equity.

• Tax treatment: Interest payments on debt are typically tax-deductible, while equity distributions are not. Hybrid instruments may be treated as debt for tax purposes if they have fixed repayment terms, or as equity if they convert or participate in profits.
• Accounting treatment: Under IFRS and GAAP, hybrid instruments may need to be split into debt and equity components on the balance sheet, which affects financial ratios and reporting.

Founders should work with accountants and tax advisors to model the impact of hybrid instruments before signing, especially if they plan to raise future venture rounds where clean cap tables and financials matter.

7. What specific financial metrics should a founder present when applying for RBF or a credit line?

Lenders for non-venture-debt alternatives look for metrics that prove revenue quality and predictability:

1. Monthly Recurring Revenue (MRR) / Annual Recurring Revenue (ARR): The absolute size and growth rate.
2. Net Revenue Retention (NRR): Proving that existing customers are expanding, not churning.
3. Customer Churn Rate: Low churn (ideally under 5% annually for B2B SaaS) proves stability.
4. Gross Margin: High margins (ideally 70%+) prove you can afford revenue share or interest payments.
5. Customer Concentration: A diversified customer base reduces risk for lenders.
6. Cash Runway: At least 6-12 months of runway signals financial discipline.
7. Accounts Receivable Aging: For invoice financing, clean AR with creditworthy customers is essential.

Presenting this data cleanly in a dashboard or financial model significantly increases approval speed and improves terms.