1) What is Venture Debt & Why Should Startups Care?

For many startups, securing capital is a balancing act between fueling growth and preserving ownership. While venture capital (VC) is a go-to funding source, it dilutes founder equity. Venture debt provides a non-dilutive alternative; a loan that extends runway, supports growth, and strengthens financial flexibility without immediately giving up equity. But like any financial instrument, venture debt is not a universal solution. Used wisely, it can be transformative. Used carelessly, it can strain operations or limit strategic flexibility.

At its core, venture debt is a loan, not an investment. It’s typically structured as a term loan or revolving credit facility, offered by banks or specialized lenders who understand the dynamics of VC-backed startups. Unlike equity financing, it doesn’t require giving up a stake in your company, though it often includes warrants, which may lead to some dilution. This makes it especially attractive for founders looking to extend their runway or capitalize on short-term opportunities without sacrificing control.

However, venture debt is usually reserved for startups with certain fundamentals in place; predictable revenue, solid VC backing, or clear growth momentum. It's not designed for very early-stage companies still searching for product-market fit or stable cash flow.

2) When Does Venture Debt Make Sense

Just as deep tech startups must time their market entry carefully, startup founders considering venture debt need to understand its most effective use cases:

Extending Runway Before the Next Round

• Gives startups extra time to hit milestones before a larger equity round.

• Reduces pressure to raise at a lower valuation due to market downturns.

  
  

Scaling Operations & Growth

• Funds hiring, product development, or expansion without sacrificing equity.

• Provides a cash buffer in case of unexpected delays.

  
  

M&A & Strategic Initiatives

• Can be used to acquire competitors, expand into new markets, or make key capital expenditures.

  
  

 ⚠️ Not for very Early-Stage Startups

• Requires predictable revenue streams or strong VC backing.

• Startups without clear cash flow risk defaulting on loan payments. 

3) Key Legal & Business Considerations

Loan Terms & Repayment Structure

• Venture debt loans typically have a term of 24 to 48 months, with an initial interest-only period followed by principal repayments.

• Lenders may include prepayment penalties, meaning startups must pay fees if they repay early.

• Some agreements include a large final payment (lump sums due at maturity), requiring careful cash flow planning.

• These loans are generally senior secured, meaning they rank above other liabilities and must be repaid first in a liquidation scenario.

  
  

Covenants & Restrictions

• Many venture debt agreements impose covenants, which are contractual obligations on the borrower, such as:

  • Minimum revenue targets or EBITDA thresholds (financial covenants).

  • Restrictions on additional borrowing, mergers, or asset sales (negative covenants).

• Breaching these covenants can trigger default provisions, potentially giving the lender control over assets or forcing early repayment.

  
  

Warrants & Equity Upside

• Some lenders require warrants, which give them the option to buy equity in the future, usually at a discounted price.

• This means that while venture debt reduces immediate dilution, it may still result in partial equity dilution down the road.

  
  

Security & Collateral

• Venture debt is usually secured by company assets as collateral, which may include equipment, receivables, intellectual property, or other valuable business assets.

  
  

Regulatory & Tax Considerations

• In Switzerland, startups must ensure venture debt structures comply with Swiss banking regulations, particularly if foreign lenders are involved. Attention should be paid to licensing requirements, the Swiss 10/20 non-bank lender rules, and potential withholding tax implications on interest payments.

  
  

4) How to Choose the Right Lender?

It’s important to get multiple term sheets so you can compare your options side-by-side and against the market median. Pick out the best elements from each offer and negotiate your ideal version. Also, watch out for hidden costs: fees can add up quickly and significantly increase the true cost of the loan. A good rule of thumb? Calculate total fees as a percentage of the loan size to get a clear picture of what you’re really paying.

Banks vs. Specialized Lenders

• Banks often require stricter covenants, while venture lenders offer flexibility but may charge higher interest rates.

  
  

Compare Terms & Reputation

• Assess multiple offers to ensure terms align with your growth strategy.

• Work with lenders who understand startups and venture-backed scaling models.

  
  

Avoid Overleveraging

• Venture debt should complement equity, not replace it.

• Raising too much debt without clear cash flow projections can create financial stress and repayment risks.

5) Is Venture Debt Right for Your Startup?

Venture debt demands strategic maturity. You’re not just taking a loan, you’re making a bet that your business will grow fast enough to pay it back, without compromising flexibility or control. It’s about time, leverage, and momentum.

It is a powerful tool that enables bold moves without giving away ownership too early when used strategically, but it’s not a free pass. They usually come with pledged assets and senior ranking, the consequences of default are significant. Founders and boards need to be rigorous in financial oversight where overindebtedness triggers legal duties.

It requires careful planning, negotiation, and an understanding of how it fits into your long-term funding strategy. 

This model from SVB illustrates the timing of venture debt and how it can be used to extend runway.

💡 The team at Alfred supports founders in evaluating strategies that align with long-term growth. Let’s talk about how we can help you make the right move at the right time.