Short answer
Venture debt costs interest on the amount borrowed, a one-off arrangement fee (often 1–3% of the facility), sometimes an exit fee and, in many deals, a warrant giving the lender a small share of the upside. Interest rates are higher than bank loans because the lender takes more risk. Measured against equity, venture debt is usually much cheaper for a company that grows, because the warrant dilutes far less than selling shares.
Key facts
- Interest: on the drawn balance, fixed or floating
- Arrangement fee: one-off, at drawdown
- Exit fee: some lenders, at repayment
- Warrants, if included: value depends on the exit
- Prepayment fees: if you repay early
What are the cost components?
| Component | When you pay | What drives it |
|---|---|---|
| Interest | Monthly or quarterly | Rate × drawn balance; higher during interest-only months |
| Arrangement fee | At drawdown | % of facility |
| Exit fee | At repayment | % of amount borrowed (not all lenders) |
| Prepayment fee | If repaid early | Often stepped down over time |
| Warrants | At exit, if the company grows | Coverage, strike price, exit value |
| Legal costs | At signing | Borrower usually pays the lender's legal fees |
Illustrative example: the full cost of £2m
Illustrative example. A company borrows £2m over 36 months: 12 months interest-only, then 24 months of capital and interest. Assume interest at 12% a year, a 3% arrangement fee and 10% warrant coverage.
- Interest: about £240,000 in year one and £260,000 over the repayment period: roughly £500,000 in total
- Arrangement fee: £60,000
- Warrants: £200,000 of coverage. If the company is later sold at three times the strike price, the warrants pay the lender £400,000
Total cost if the company triples in value: about £960,000.
How does that compare with equity?
Raising the same £2m as equity at a £25m post-money valuation sells 8% of the company. If the company is later sold for £75m (three times the valuation), that 8% is worth £6m. The debt in the example above cost under £1m. If the company does not grow, equity is cheaper, because debt must be repaid regardless. That is the core trade-off: debt is cheap if you succeed and a burden if you don't. See venture debt vs equity.
How to compare offers
- Compare total cost over the expected life, not the headline rate.
- Ask whether warrants are based on the full facility or only what you draw.
- Check exit, prepayment and undrawn fees.
- Weigh flexibility: interest-only length, covenants and whether the lender needs a new equity round.
How Nighthawk does it
Nighthawk charges a 3% arrangement fee, interest of 12–18% a year, and warrants of 0–20% of the facility.
Related questions
Is venture debt interest tax-deductible?
Interest is generally a deductible business expense, subject to the UK's corporate interest restriction rules. Check with your tax adviser.
Is venture debt cheaper than equity?
For a company that grows, almost always. For a company that doesn't, no, because the debt must still be repaid.