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 also 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

What is a venture loan?

A venture loan, also called venture debt, is a type of financing provided to startups and high-growth companies, typically alongside or between equity funding rounds. It’s offered by specialized lenders (not traditional banks) and provides cash without immediate ownership dilution.

Is venture debt good?

It can be. Venture debt helps companies extend their runway, finance growth, or bridge funding gaps without giving up more equity. But it also comes with risks like high interest rates, repayment obligations, and covenants. It’s best for companies with predictable growth and a solid plan for repayment.

Do you have to pay back venture debt?

Yes. Venture debt must be repaid, usually over 1.5 to 3 years, with interest. Unlike equity, it’s not a share of ownership but a loan with legal obligations. Some agreements may also include warrants or other clauses that affect long-term cost.

What is the typical interest rate for venture debt?

Interest rates for venture debt are typically higher than bank loans, often between 8% and 15%, but in some cases, they can reach 20–25% depending on the lender, the company’s risk profile, and whether warrants or fees are involved.