Not every business fits a bank’s checklist. Venture debt, revenue-based financing, structured credit and surety bonds can fill the gap. Here is how each works, what it costs you, and when to stay away.
Venture debt
A loan for startups that have raised money from venture capital funds. The lender looks at your last funding round rather than your profits. The loan usually runs for two to three years and is often 20% to 30% of the last round, depending on the lender and how steady your revenue is.
The lender also takes a small warrant, which is a right to buy a few shares later. So there is some dilution, but far less than raising the same amount as equity.
It helps in three cases: to stretch your cash to a clear milestone, to pay for a specific need that earns back its cost, or to top up a round that came in smaller than planned.
When venture debt makes things worse
If there is no clear path to the next funding round, a loan usually adds to the problem. You now have monthly repayments on top of a cash shortage, and a lender who is paid before any shareholder.
A simple test: once you start paying the instalments, does your remaining cash last until a milestone an investor would fund? If not, borrowing will not fix it.
Terms to read carefully
- The warrant. Does it convert at the last round’s price or the next one?
- Material adverse change clause. If it is worded too widely, the lender can refuse to release the next part of the loan just when you need it.
- Deadline clauses. Some loans become payable at once if the next round does not close by a set date.
- Early repayment. Check that you can repay early, without a penalty, once the next round closes.
Revenue-based financing
You repay a fixed share of your monthly revenue until an agreed amount has been paid back. In a weak month you pay less. It suits businesses with steady sales.
Structured credit
A loan built around a specific asset or a contracted stream of cash, such as a long-term customer contract. It costs more than a bank loan because the lender takes more risk, and the price differs from deal to deal. Where such an asset exists, it can still cost less than venture debt.
Surety bonds
A surety bond is issued by an insurance company instead of a bank. In many government and infrastructure tenders it can be used in place of a bank guarantee, if the tender allows it. The benefit is that it does not use up your bank limits.
Check the cheaper options first
A working capital limit from a bank or NBFC usually costs less than all of the above. A company with real stock and debtors often qualifies for more ordinary bank credit than it expects.
Our venture debt guide goes deeper into sizing and costs, and the debt capacity calculator shows what your cash flow can support.
Common questions
Usually 20% to 30% of the last equity round. What matters more is whether, after paying the instalments, the company still has enough cash to reach its next funding milestone.
Only slightly. Lenders usually take a small warrant, which is a right to buy shares later. That is far less dilution than an equity round.
Yes. The rate depends on the risk in each deal, so there is no standard price. We give you a realistic range once we understand your cash flows.
In many government and infrastructure tenders, yes, but only if the tender conditions allow it. The benefit is that it does not use up your bank limits.
This article is general information, not lending, tax or legal advice. Statutory positions and lender practice change. See our terms of use, and talk to our team for advice on your own situation.