Short answer
Venture debt is a term loan for venture-backed companies that aren't yet suited to bank lending. Companies usually raise it alongside or soon after an equity round to extend their runway. A typical facility runs for three to four years: an interest-only period first, then monthly or quarterly repayments of capital and interest. Many lenders also take a small warrant, but even then dilution is a fraction of an equivalent equity raise. Unlike equity, it must be repaid.
Key facts
- Borrower: venture-backed companies, usually from Series A onwards
- Term: typically 3–4 years
- Interest-only period: often 6–18 months at the start
- Lender's return: interest, an arrangement fee and, in many deals, a warrant
- Main use: extending runway to the next milestone or funding round
Why do venture-backed companies use debt?
Venture debt extends runway without selling more shares. A company that has just raised equity can add debt to reach a bigger milestone (more revenue, a key product launch, profitability) before its next round, so it raises that round at a higher valuation.
Banks rarely lend to loss-making, fast-growing companies because they lend against profits or hard assets. Venture debt lenders lend against something else: the company's growth, its investors' support and the value of its technology.
How is a venture debt facility structured?
Most facilities have the same building blocks:
- Facility size. Often sized relative to the company's revenue or its last equity round.
- Drawdown. The company draws the money in one amount or in tranches, sometimes tied to milestones.
- Interest-only period. For the first months, the company pays only interest, keeping cash for growth.
- Amortisation. After that, the company repays capital and interest monthly or quarterly until the loan matures.
- Warrants. Not every facility includes them, but many lenders take the right to buy a small number of shares at a set price.
- Security and covenants. The loan is usually secured over the company's assets, with conditions the borrower agrees to meet.
What does venture debt cost?
The cost has three parts: interest on the amount borrowed, a one-off arrangement fee, and, where the lender takes one, the value of a warrant. Some lenders also charge exit or prepayment fees. Interest rates are higher than bank loans, because the lender takes more risk, but the total cost is usually far lower than the dilution of raising the same amount in equity. Our guide to how much venture debt costs works through a full example.
Who is venture debt for?
Venture debt suits companies that:
- have raised institutional equity and have investors able to support them again
- have recurring or predictable revenue
- have a credible plan to reach profitability or their next round within the loan's life
- own valuable technology or IP
It does not suit pre-revenue companies, companies funding one uncontracted deal, or companies with only a few months of cash left. See when to raise venture debt.
What are the risks for founders?
Venture debt must be repaid whether or not the plan works. The main risks are:
- Repayments start. When the interest-only period ends, regular payments rise. The forecast must show how the company covers them.
- Covenants. Breaching a covenant can let the lender demand early repayment.
- A slipping round. If the next equity round is late, the company is servicing debt from a shrinking cash balance.
The safest use is to extend a runway that is already healthy, not to rescue one that is running out.
Venture debt vs other funding
| Venture debt | Equity | Revenue-based finance | Bank loan | |
|---|---|---|---|---|
| Dilution | None, or small if warrants | Significant | None | None |
| Repayment | Interest-only, then monthly or quarterly | None | Share of monthly revenue | Monthly |
| Needs profits | No: needs a path to them | No | No | Usually |
| Board seat | Rarely | Often | No | No |
More detail: venture debt vs equity and venture debt vs revenue-based finance.
How does the process work?
A venture debt process usually takes six to ten weeks: an intro call, a credit review of the company's accounts, forecasts and investors, indicative terms, due diligence and credit committee approval, then legal documents and drawdown. Our guide to venture debt term sheets explains what the terms mean.
Guides in this section
Venture Debt Warrants Explained
Read the guide →Venture Debt Interest-Only Periods Explained
Read the guide →Venture Debt Covenants Explained
Read the guide →How Much Does Venture Debt Cost?
Read the guide →When Should You Raise Venture Debt?
Read the guide →Venture Debt vs Revenue-Based Finance: Which Fits Your Company?
Read the guide →Venture Debt Term Sheets Explained, Clause by Clause
Read the guide →
How Nighthawk does it
Nighthawk lends £1m–£25m to VC-backed tech companies from Series A, over 36–48 months with 12–18 months interest-only. We charge a 3% arrangement fee, take warrants of 0–20% of the facility with a 7-year life, and take no personal guarantees or board seat. We can lend between equity rounds.
FAQs
Is venture debt a loan?
Yes. It is a term loan with a fixed repayment schedule, usually secured on the company's assets. Unlike equity, it must be repaid, but it dilutes shareholders far less.
When should a company raise venture debt?
Usually alongside or shortly after an equity round, when investor support is fresh and the debt can extend runway to the next milestone. Raising when cash is nearly gone is harder and more expensive.
Do venture debt lenders take equity?
Not directly. Many take warrants: the right to buy a small number of shares later at a set price. Some venture debt loans have no warrants at all. Warrants are often settled in cash at an exit.
How much venture debt can a company raise?
It depends on revenue, the equity raised and the path to breakeven. Lenders often size facilities against annual recurring revenue or a share of the last equity round.
Is venture debt risky?
It is riskier than equity for the company because it must be repaid. It works best for companies with a clear path to their next milestone and supportive investors.