Software Debt Q4 2024 Report: $18 Billion Across 1000 Borrowers

As of Q4 2024, the 14 largest publicly traded BDC’s (Business Development Corporations) remained extremely active lending to software companies. As of Dec 31 2024, they’ve deployed over $27.7 billion across 2,077 loans. 

As traditional banks like SVB and CIBC lending continued to retreat from the middle market, alternative lenders stepped in to fill the void, providing critical growth capital to software companies navigating an election year uncertain macroeconomic environment.

I analyzed the 14 largest publicly traded lenders which showed a market characterized by increased competition, sophisticated deal structures, and a continued focus on recurring revenue business models. 

The average loan size reached $13.3 million, with interest rates typically ranging from 9% to 14%, reflecting both the cost of capital and the perceived risk in the software sector.

14 Largest Funds

Name	# of Deals	$ Value of Deals
Ares	217	$5,593.7M
Morgan Stanley	368	$3,802.3M
Sixth Street	182	$3,509.2M
Main Street	271	$3,269.8M
Midcap	369	$2,849.7M
Blackstone	108	$2,577.4M
Blue Owl	70	$1,980.5M
FS KKR	64	$1,566.5M
Trinity	131	$1,372.7M
Hercules	54	$1,098.9M

The venture debt landscape in 2024 was dominated by established players who leveraged their scale, expertise, and capital access to maintain market leadership. 

Ares Capital Corporation (NASDAQ: ARCC) emerged as the clear leader by dollar volume, deploying nearly $5.6 billion across 217 deals. This represents an average deal size of $25.8 million, significantly higher than the market average, indicating Ares’ focus on larger, more established software companies.

Morgan Stanley Direct Lending (NASDAQ: MSDL) led in deal count with 368 transactions, demonstrating a high-velocity approach focused on smaller and mid-sized opportunities. Their $3.8 billion deployment across these deals resulted in an average transaction size of $10.3 million, positioning them as a go-to lender for growth-stage software companies seeking more modest capital injections.

Sixth Street Specialty Lending (NYSE: TSLX) struck a balance between volume and size, completing 182 deals worth $3.5 billion. Their average deal size of $19.3 million reflects a strategy targeting the upper middle market, where software companies often need substantial capital for acquisitions, product development, or market expansion.

The concentration of capital among the top 10 lenders is notable, with these firms accounting for over 85% of total market volume of loans to software companies. This consolidation reflects the capital-intensive nature of the business and the advantages of scale in sourcing, underwriting, and managing a diversified portfolio of software loans.

Election Year Macroeconomic Volatility

The 2024 software debt market operated against a backdrop of significant macroeconomic uncertainty. The Federal Reserve’s interest rate policy, which maintained elevated rates throughout most of the year, created both challenges and opportunities for lenders. Higher base rates allowed lenders to generate attractive returns, but also increased the debt service burden on borrowers, requiring more selective underwriting.

Software companies, particularly those in the growth stage, faced a challenging equity financing environment. Venture capital deployment remained well below 2021 peaks, and valuations continued to normalize from pandemic-era highs. This dynamic drove many companies to the debt markets as an alternative source of growth capital, often preferring the non-dilutive nature of debt despite higher interest costs.

The competitive landscape among lenders intensified throughout 2024. With a finite universe of high-quality software borrowers, lenders differentiated themselves through speed of execution, flexibility in deal structures, and value-added services. 

Many funds developed specialized software lending teams with deep domain expertise, allowing them to move quickly on opportunities and provide strategic guidance to portfolio companies.

New Deals Completed

The fourth quarter of 2024 saw a flurry of activity as lenders rushed to deploy capital before year-end. Of the BDCs that report origination dates, 57 new loans were originated in Q4 2024, representing a significant uptick in activity. Blackstone was the most active lender with 18 deals totaling $323.1 million, followed closely by Sixth Street with 16 deals worth $284.2 million.

Q4 2024 Origination Leaders

Lender	# of Deals	Total Value
Blackstone	18	$323.1M
Sixth Street	16	$284.2M
Trinity	13	$170.3M
Main Street	10	$236.0M

The diversity of deal structures in Q4 highlighted the sophistication of the market. Interest rate structures varied significantly based on borrower profile and market conditions. For example, SOCi, Inc. secured a $3.3 million facility from Trinity with a variable rate of SOFR 3 Month Term (4.5%) + 7.9%, reflecting the lender’s confidence in the company’s social media management platform.

Centivo Corporation’s deal structure exemplified the creative approaches lenders took to balance risk and return. Their $3.8 million facility featured a variable rate of PRIME (7.5%) + 4.5% with a floor of 11.3%, plus a 1.0% PIK (Payment-in-Kind) component and a 2.0% exit fee. This multi-layered structure allowed the lender to achieve target returns while providing the borrower with some cash flow flexibility through the PIK feature.

The prevalence of SOFR (4.5%) and PRIME (7.5%)-based floating rate structures in Q4 deals reflected lenders’ desire to maintain margins in a potentially changing rate environment. Hometown Ticketing, Inc.’s $24.9 million facility at SOFR 3 Month Term + 7.7% represented one of the larger Q4 transactions, demonstrating continued lender appetite for companies with strong recurring revenue models in vertical software markets.

Interest Rate Averages

The interest rate environment in 2024 presented both opportunities and challenges for software debt market participants. Base rates remained elevated throughout the year, with SOFR trading in the 4.5-5.0% range and Prime rates hovering around 7.5-8.0%. This resulted in all-in interest rates for software borrowers typically ranging from 9% to 15%, depending on company profile, deal size, and structure.

Several trends emerged in deal structuring throughout 2024:

Floating Rate Dominance: Over 75% of new originations featured floating rate structures, primarily indexed to SOFR or Prime. This protected lenders from potential rate decreases while transferring interest rate risk to borrowers. Many deals included floors to ensure minimum returns, typically set at current market levels.

PIK Toggle Features: Payment-in-Kind options became increasingly common, appearing in approximately 30% of deals. These features allowed borrowers to preserve cash during growth investments while providing lenders with enhanced returns through compounding interest. PIK rates typically ranged from 1-3% above cash rates.

Enhanced Covenant Packages: Lenders tightened covenant packages in response to market uncertainty. Common covenants included minimum revenue levels, maximum leverage ratios, and minimum liquidity requirements. Monthly reporting became standard, allowing lenders to monitor performance closely.

Warrants and Equity Kickers: While less common than in traditional venture debt, equity participation features appeared in roughly 15% of transactions. These typically took the form of penny warrants or success fees tied to exit events, providing lenders with upside participation in borrower success.

Dropbox Loan

The year’s most significant transactions showcased the breadth and depth of the software debt market. These deals ranged from growth capital for emerging leaders to refinancing for established platforms.

Major 2024 Software Lending Transactions

Bestow, Inc. – Trinity: This $40.0 million facility at 14.0% interest, closed in August, provided growth capital for the insurtech platform. Bestow’s use of technology to streamline life insurance underwriting and distribution attracted significant lender interest despite the challenging venture environment. The higher interest rate reflected both the company’s growth stage and the competitive dynamics in the insurtech space.

Dropbox Inc – Blackstone: Closed in December, this $34.4 million facility at 11.0% demonstrated continued lender appetite for established software platforms. Despite Dropbox’s public company status, the debt facility provided flexible growth capital for strategic initiatives without diluting shareholders. The relatively attractive pricing reflected Dropbox’s stable revenue base and strong cash flow generation.

Centre Technologies Holdings, LLC – Main Street: This $25.5 million transaction at 14.0%, closed in November, exemplified the robust market for vertical software platforms. Centre Technologies’ focus on specific industry verticals aligned with lender preferences for businesses with deep customer relationships and low churn rates.

GraphPad Software, LLC – Blackstone: The $24.1 million facility at 9.0% interest, closed in June, represented one of the year’s most attractively priced deals. GraphPad’s scientific software platform, used by researchers worldwide, commanded favorable terms due to its mission-critical nature and loyal customer base. The pricing demonstrated that established software companies with strong fundamentals could still access capital at reasonable rates.

Top Software Founders Use Debt

Our analysis identified several high-profile software companies that accessed the debt markets in 2024, demonstrating that debt financing has become a mainstream option for companies across the growth spectrum.

Leading Software Borrowers by Loan Size

Cornerstone OnDemand, Inc.: The human capital management leader secured $137.5 million at 11.0% interest, using the proceeds for product development and potential acquisitions. Cornerstone’s comprehensive platform for recruiting, training, and managing employees positioned it well in the tight labor market.

Hyland Software, Inc.: The content services platform raised $96.6 million at 10.0%, reflecting strong lender confidence in its enterprise customer base and recurring revenue model. Hyland’s focus on digital transformation solutions for highly regulated industries provided defensive characteristics attractive to lenders.

WP Engine, Inc.: The WordPress hosting platform’s $66.5 million facility at 11.0% supported its continued growth in the managed hosting market. WP Engine’s combination of technical infrastructure and value-added services created a sticky customer base that lenders found compelling.

Zendesk Inc: Despite being a public company, Zendesk accessed $59.5 million in debt financing at 10.0% to support strategic initiatives. The customer service platform’s strong market position and predictable revenue streams enabled attractive pricing despite broader market volatility.

These transactions highlighted several key themes in software lending:

• Recurring Revenue Preference: Lenders strongly favored SaaS and subscription-based business models
• Enterprise Focus: B2B software companies generally received better terms than consumer-focused platforms
• Vertical Specialization: Companies with deep domain expertise in specific industries commanded premium valuations

Exit Fee Analysis

Exit fees emerged as a critical negotiation point in 2024 software debt transactions, with our analysis of 24 loans revealing an average exit fee of 3.95%. These fees, paid upon loan prepayment or maturity, represent a significant component of lender returns and borrower costs.

Exit Fee Analysis

The highest exit fees in our sample included:

• Pindrop Security, Inc.: 6.50% on a $31.0 million loan
• Cutover, Inc.: 6.28% on a $1.3 million loan
• Mobile Solutions Services: 5.95% on an $18.4 million loan

Exit fees serve multiple purposes in software debt transactions. For lenders, they provide back-end yield enhancement and compensation for early prepayment risk. Software companies, particularly those in high-growth phases, often refinance or exit debt facilities earlier than maturity as they access new funding sources or achieve liquidation events.

From a borrower’s perspective, the decision to accept exit fees involves several considerations:

Total Cost of Capital: Exit fees should be evaluated as part of the all-in cost of debt. A loan with a lower interest rate but high exit fee may be more expensive than alternatives, depending on expected hold period.

Flexibility vs. Cost: Higher exit fees typically accompany otherwise more flexible deal terms. Borrowers must weigh the value of features like covenant-lite structures or PIK toggles against back-end costs.

Expected Exit Timeline: Companies with clear paths to equity financing or M&A events should carefully model exit fee impact. A 5% exit fee on a loan repaid after 18 months effectively adds over 3% to the annual cost of capital.

Negotiation Dynamics: Exit fees often serve as a negotiation lever. Borrowers with multiple term sheets can use exit fee differentials to improve other terms or reduce overall pricing.

Our analysis suggests that exit fees between 2-4% represent market norms for quality borrowers, while fees above 5% typically indicate either borrower credit concerns or highly competitive situations where lenders need back-end economics to meet return targets.

NYC, SF, Texas Dominate

The geographic distribution of software debt deals in 2024 reflected the continued concentration of technology companies in traditional hubs, while also showing expansion into emerging markets. 

California maintained its dominance, capturing approximately 35% of total deal volume, with the San Francisco Bay Area alone accounting for over $8 billion in software debt transactions.

New York emerged as the second-largest market, with roughly 18% of deal volume, driven by a combination of fintech platforms, enterprise software companies, and digital media businesses. The state’s diverse economy and deep talent pool continued to attract software entrepreneurs and, consequently, lender attention.

Texas showed remarkable growth, climbing to third position with 12% of market share. Austin’s emergence as a major tech hub, combined with Houston’s energy tech sector and Dallas’s enterprise software cluster, created a diverse borrowing base. The state’s business-friendly environment and lack of state income tax proved attractive to both companies and employees.

Emerging markets showed promising growth trajectories. Colorado, particularly the Denver-Boulder corridor, saw deal volume increase by 45% year-over-year. The Research Triangle in North Carolina and South Florida also experienced significant growth, driven by relocated companies and new startup formation.

International expansion remained limited but growing. While the vast majority of deals involved US-based companies, several large lenders began exploring opportunities in Canada and the UK. Regulatory complexity and currency risk continued to limit international deployment, but market participants expected gradual expansion in 2025 and beyond.

Vertical SaaS Getting Best Terms

The software debt market in 2024 showed distinct preferences for certain subsectors, reflecting both lender risk appetite and market dynamics.

Vertical SaaS: These specialized platforms commanded premium attention and pricing. Healthcare IT, financial services software, and legal tech platforms benefited from deep customer relationships and high switching costs. Average interest rates for vertical SaaS companies ran 100-150 basis points below market averages.

Enterprise Infrastructure: Companies providing critical infrastructure components—from cybersecurity to data management—attracted significant lender interest. The mission-critical nature of these solutions and enterprise buying patterns created predictable revenue streams that lenders valued highly.

AI and Machine Learning: Despite the hype cycle, pure-play AI companies found debt financing challenging. Lenders remained cautious about business model durability and competitive moats. However, established software companies adding AI capabilities accessed debt markets successfully, using the capital to fund R&D and talent acquisition.

Fintech: The sector experienced a tale of two markets. Established platforms with proven unit economics and regulatory compliance accessed debt at attractive rates. Earlier-stage fintech companies, particularly those in crypto or highly regulated spaces, faced limited options and higher pricing.

Consumer Software: Direct-to-consumer software companies faced the most challenging debt environment. Higher churn rates, marketing costs, and platform dependency concerned lenders. The few successful consumer software debt raises typically involved companies with strong subscription metrics and diversified acquisition channels.

Lending Products

Software debt structures evolved significantly throughout 2024, reflecting both market maturation and lessons learned from previous cycles. Traditional term loans remained dominant, but innovative structures gained traction.

Delayed Draw Term Loans: These facilities, allowing borrowers to access capital over time, grew to represent nearly 20% of new originations. The structure aligned well with software companies’ unpredictable capital needs and helped minimize unnecessary interest expense.

Revenue-Based Financing Elements: Some lenders experimented with hybrid structures incorporating revenue-based repayment features. These deals typically included a base interest rate plus a percentage of monthly revenue, aligning lender returns with borrower success.

Milestone-Based Tranches: Multi-tranche facilities tied to operational or financial milestones became more common. This structure allowed lenders to manage risk while providing borrowers with growth capital as they achieved key objectives.

Convertible Debt Features: While less common in the institutional market, some growth-stage deals included conversion features. These typically activated only in downside scenarios, providing lenders with additional protection while avoiding dilution in successful outcomes.

Covenant Analysis

Covenant packages in 2024 reflected lenders’ focus on early warning signals and proactive portfolio management. The days of covenant-lite software debt largely ended as market volatility reminded participants of the importance of ongoing monitoring.

Financial Covenants: Minimum revenue levels emerged as the most common financial covenant, appearing in over 80% of deals. These typically started at 80-90% of base case projections, providing cushion while ensuring businesses remained on track. Leverage ratios, typically defined as debt-to-annualized revenue, provided additional protection.

Operational Covenants: Lenders increasingly required operational metrics reporting, including customer counts, churn rates, and sales pipeline data. This granular information allowed for early intervention when businesses showed signs of stress.

Liquidity Requirements: Minimum cash balance requirements, typically 3-6 months of operating expenses, became standard. These covenants protected lenders while ensuring borrowers maintained adequate runway to navigate challenges.

Reporting Requirements: Monthly reporting became the norm, with most lenders requiring detailed financial statements, management commentary, and key metric dashboards within 30 days of month-end. Quarterly calls with management teams provided additional insight into business performance.

ESG Considerations

Environmental, Social, and Governance (ESG) factors played an increasingly important role in 2024 software debt underwriting. While software companies generally have limited environmental impact compared to traditional industries, governance and social factors proved critical.

Governance Focus: Lenders scrutinized board composition, equity ownership structures, and management incentive alignment. Companies with independent board members and robust governance practices often received better terms.

Cybersecurity Requirements: Data breaches and security incidents could devastate software companies. Lenders increasingly required comprehensive cybersecurity assessments, insurance coverage, and incident response plans.

Diversity Metrics: Some lenders began incorporating diversity metrics into their underwriting process. Companies with diverse leadership teams and inclusive cultures were viewed as better long-term risks, reflecting research linking diversity to improved business outcomes.

Customer Privacy: With increasing regulatory focus on data privacy, lenders evaluated borrowers’ compliance with regulations like GDPR and CCPA. Strong privacy practices reduced regulatory risk and enhanced customer trust.

2025 Debt Outlook

As we look toward 2025, several trends appear poised to shape the software debt market:

Rate Environment: Market participants expect continued volatility in interest rates, with potential Fed rate cuts balanced against persistent inflation concerns. Floating rate structures will likely remain dominant, with increasingly sophisticated hedging strategies.

Competition: New entrants, including traditional banks returning to the market and specialized software lenders, will increase competition. This should benefit borrowers through better terms and more creative structures.

Technology Integration: Lenders will increasingly leverage technology for underwriting and monitoring. AI-powered analysis of software metrics, automated reporting, and real-time performance dashboards will become standard.

International Expansion: Cross-border software lending will accelerate as lenders seek growth and diversification. European and Asian markets present significant opportunities for experienced US lenders.

Consolidation: The lender landscape may see consolidation as subscale players struggle to compete. Larger platforms with operational leverage and diversified funding sources will likely acquire smaller competitors.

Risk Management and Loss Mitigation

The 2024 software debt market benefited from relatively benign credit conditions, but lenders remained focused on risk management given macroeconomic uncertainty.

Portfolio Diversification: Successful lenders maintained strict concentration limits, typically capping exposure to any single borrower at 3-5% of the portfolio and industry verticals at 15-20%. This diversification proved critical as certain software sectors faced headwinds.

Workout Capabilities: Lenders invested heavily in workout and restructuring teams, recognizing that early intervention could minimize losses. These teams worked closely with struggling borrowers to adjust business models, reduce costs, or find strategic alternatives.

Secondary Market Development: The secondary market for software debt became more active in 2024, providing liquidity for lenders needing to manage exposures. Pricing transparency improved, though bid-ask spreads remained wide for stressed credits.

Insurance Products: Some lenders explored portfolio insurance products to manage tail risks. While expensive, these products provided protection against catastrophic losses from events like widespread technology obsolescence or regulatory changes.

The Talent War in Software Lending

The human capital requirements for successful software lending intensified in 2024. Leading funds competed aggressively for talent combining software expertise, credit skills, and relationship management capabilities.

Specialized Teams: Most major lenders built dedicated software lending teams, often hiring from technology companies, venture capital funds, or investment banks. This domain expertise proved critical for rapid underwriting and effective portfolio management.

Compensation Evolution: Software lending professionals commanded premium compensation, with senior originators earning packages competitive with private equity. Performance-based compensation aligned individual incentives with portfolio outcomes.

Training Programs: Forward-thinking lenders invested in comprehensive training programs, recognizing that developing internal talent provided competitive advantages. These programs covered everything from SaaS metrics to technical due diligence.

Retention Challenges: High demand for experienced software lending professionals created retention challenges. Firms responded with long-term incentive plans, carried interest participation, and clear advancement paths.

Tech Infra for Lenders

Lenders themselves became technology companies in 2024, investing heavily in systems to originate, underwrite, and monitor software loans efficiently. This technological transformation represented a fundamental shift in how lending businesses operate, moving from relationship-driven, manual processes to data-driven, automated workflows.

Origination Platforms: CRM systems designed specifically for lending workflows became table stakes. These platforms tracked deal flow, managed document collection, and coordinated internal approvals. Leading platforms integrated with data providers to automatically populate company information, reducing manual data entry and accelerating initial screening. Advanced systems incorporated AI-powered lead scoring, helping originators prioritize opportunities most likely to close. Integration with email and calendar systems ensured no follow-up was missed, while automated workflow routing streamlined internal approvals.

Underwriting Tools: Advanced analytics platforms helped lenders evaluate software companies more effectively. These tools ingested company metrics, analyzed cohort behavior, and projected future performance using machine learning models. 

The most sophisticated platforms could automatically extract key metrics from borrower-provided data, benchmark performance against industry peers, and flag potential risks or anomalies. Some lenders developed proprietary scoring models that considered hundreds of variables, from code repository activity to customer support ticket volumes, providing a holistic view of company health.

Portfolio Monitoring: Real-time dashboards connected to borrower systems provided continuous monitoring capabilities. Alerts based on predefined triggers allowed for proactive portfolio management. Modern monitoring systems went beyond financial metrics, tracking operational KPIs, competitive dynamics, and even employee sentiment through Glassdoor reviews. 

This 360-degree view enabled lenders to identify problems before they appeared in financial statements, allowing for early intervention. Some platforms incorporated natural language processing to analyze management communications, flagging changes in tone or messaging that might indicate stress.

Investor Reporting: As Limited Partners demanded more transparency, lenders built sophisticated reporting infrastructure. These systems provided detailed portfolio analytics, performance attribution, and risk metrics. 

Interactive dashboards allowed LPs to drill down into specific investments, understand portfolio construction decisions, and model various stress scenarios. The best systems automated report generation, ensuring consistent, timely delivery of information while freeing investment professionals to focus on value-added activities.

Data Integration Challenges: Building this technology stack presented significant challenges. Integrating disparate data sources, ensuring data quality, and maintaining security while providing access required substantial investments. Many lenders partnered with specialized technology vendors rather than building entirely in-house, creating a growing ecosystem of lending technology providers.

Macroeconomic Factors

The macroeconomic environment of 2024 created a complex backdrop for software lending decisions. Understanding these factors proved critical for both lenders and borrowers navigating an uncertain landscape.

Interest Rate Environment: The Federal Reserve’s monetary policy stance throughout 2024 significantly impacted software lending dynamics. With the federal funds rate remaining elevated in the 4.75-5.25% range for much of the year, base borrowing costs stayed high by historical standards. 

This environment created several knock-on effects. Software companies faced higher hurdle rates for growth investments, leading to more selective capital deployment. Lenders benefited from wider spreads but also faced increased competition from traditional fixed income investments offering attractive risk-adjusted returns. 

The inverted yield curve persisting through much of 2024 created funding challenges for some lenders, particularly those relying on short-term financing sources.

Inflation Dynamics: While inflation moderated from 2022-2023 peaks, it remained above the Fed’s 2% target throughout 2024. For software companies, this presented mixed impacts. Those with strong pricing power successfully passed through cost increases, actually improving unit economics in some cases. 

However, companies serving price-sensitive customer segments faced margin pressure as wage inflation, particularly for technical talent, outpaced revenue growth. Lenders had to carefully underwrite these differing inflation impacts, favoring companies with demonstrated pricing power and stable or improving margins.

Venture Capital Market Conditions: The venture capital market’s continued recalibration profoundly impacted software debt demand. With VC funding down approximately 40% from 2021 peaks, many growth-stage software companies turned to debt as an alternative funding source. 

This dynamic created opportunities for debt providers but also required careful selection, as some companies seeking debt were doing so because equity was unavailable at any reasonable valuation. The best lenders developed frameworks to distinguish between companies using debt strategically versus those using it out of desperation.

Public Market Valuations: Public software company valuations provided important benchmarks for private market lending decisions. The volatility in public SaaS multiples throughout 2024—ranging from 4x to 8x forward revenue depending on growth rates and profitability—created challenges in underwriting private companies. 

Lenders increasingly focused on sustainable unit economics rather than growth at any cost, reflecting public market preferences. The performance of recently public software companies also influenced lending appetite, with successful IPOs encouraging more aggressive lending while broken IPOs prompted caution.

Global Economic Uncertainty: Geopolitical tensions, trade policy uncertainty, and varying economic growth rates across regions created additional complexity. Software companies with significant international exposure faced currency headwinds and demand uncertainty in certain markets. Lenders had to evaluate geographic concentration risks carefully, often requiring hedging strategies or geographic diversification plans from borrowers with material foreign exposure.

Due Diligence Practices

The due diligence process for software lending became more comprehensive, data-driven, and efficient through technology adoption in 2024.

Technical Due Diligence: Lenders increasingly incorporated deep technical diligence into their underwriting process. This went beyond traditional financial analysis to examine code quality, technical debt, architecture scalability, and development practices. Many lenders partnered with specialized technical diligence firms or hired former CTOs and engineering leaders to evaluate technical risks. 

Key areas of focus included: infrastructure costs and scalability, security architecture and compliance, technical differentiation and defensibility, development velocity and engineering productivity, and technical debt that might require future investment.

Customer Diligence: Understanding customer dynamics became paramount in 2024’s competitive environment. Lenders routinely conducted customer calls, analyzing satisfaction, expansion potential, and competitive threats. Advanced lenders used tools like Gong or Chorus to analyze sales calls, identifying potential churn risks or upsell opportunities. 

Net Promoter Score (NPS) analysis, cohort retention studies, and win/loss analysis became standard diligence requirements. Some lenders even conducted anonymous customer surveys to validate company-provided metrics.

Competitive Analysis: With the software market’s continued maturation, competitive dynamics received increased scrutiny. Lenders invested in competitive intelligence tools, tracking feature releases, pricing changes, and market share shifts. 

This analysis helped identify companies with sustainable competitive advantages versus those in commoditizing markets. Partnership ecosystems also received attention, as strong technology partnerships could provide competitive moats or, conversely, create platform risk.

Financial Diligence Enhancement: Traditional financial diligence expanded to include more sophisticated analyses. Revenue quality assessments examined the sustainability and predictability of revenue streams. Cohort analyses became increasingly granular, examining behavior across customer segments, acquisition channels, and time periods. Unit economic calculations incorporated fully-loaded costs, including often-overlooked items like payment processing fees and infrastructure costs. Scenario analyses tested business resilience under various conditions, from loss of major customers to competitive pricing pressure.

Operational Diligence: Lenders recognized that operational excellence often differentiated successful software companies. Diligence expanded to cover organizational design, hiring and retention practices, product development processes, and go-to-market efficiency. Some lenders used organizational network analysis tools to understand communication patterns and identify potential organizational risks. Sales productivity metrics, R&D efficiency ratios, and customer success effectiveness all became standard diligence items.

Speed and Efficiency: Despite expanded scope, competitive pressure demanded faster diligence processes. Leading lenders streamlined diligence through standardized data requests, automated analysis tools, and parallel work streams. The average diligence timeline compressed from 6-8 weeks to 3-4 weeks for standard transactions. This efficiency required significant upfront investment in processes and technology but proved essential for winning competitive deals.

Regulatory Environment and Compliance

The regulatory landscape for software debt remained relatively favorable in 2024, though certain areas attracted increased scrutiny.

Bank Regulatory Changes: Updates to bank leveraged lending guidance created opportunities for non-bank lenders. Banks’ retreat from loans exceeding 6x leverage ratios opened significant market share for alternative lenders.

SEC Oversight: The Securities and Exchange Commission increased focus on private fund advisers, including those managing BDCs. Enhanced reporting requirements and examination priorities required significant compliance investments.

State-Level Regulation: California’s expanding privacy regulations and New York’s cybersecurity requirements for financial services created additional compliance obligations for lenders with multi-state portfolios.

Tax Considerations: The tax treatment of software debt structures remained complex. Careful structuring around Original Issue Discount (OID) rules and withholding tax obligations required specialized expertise.

Case Studies

Several 2024 transactions exemplified best practices in software lending:

Case Study 1: Vertical SaaS Platform A healthcare IT company secured $35 million from a leading BDC at SOFR + 6.5%. The company’s 120% net revenue retention, 50,000+ provider network, and HIPAA-compliant infrastructure justified attractive pricing. The lender’s healthcare expertise enabled rapid due diligence and ongoing value-add support.

Case Study 2: Infrastructure Software Scale-Up A developer tools company raised $50 million to fund strategic acquisitions. The complex structure included a $30 million term loan and $20 million delayed-draw facility. Milestones tied to integration success and revenue synergies protected the lender while providing execution flexibility.

Case Study 3: Turnaround Success A struggling marketing automation platform worked with its lender to restructure $25 million in debt. The collaborative approach included covenant resets, PIK interest during the turnaround period, and warrants providing upside participation. The company successfully returned to growth, validating the partnership approach.

Lessons Learned and Best Practices

The 2024 software debt market provided valuable lessons for both borrowers and lenders:

For Borrowers:

• Start fundraising processes early, as diligence timelines extended
• Prepare comprehensive data rooms with cohort analyses and unit economics
• Consider multiple financing options, including different lender types
• Focus on sustainable growth metrics over growth at any cost
• Maintain transparent communication with lenders throughout the relationship

For Lenders:

• Deep software expertise proves essential for successful underwriting
• Proactive portfolio management prevents small issues from becoming large problems
• Flexible deal structures can create win-win outcomes
• Technology infrastructure investments pay dividends through efficiency gains
• Reputation in the founder community drives deal flow quality

The Future of Software Debt

As we look beyond 2024, several emerging trends promise to reshape the software debt landscape fundamentally. These developments reflect both technological advancement and market maturation, creating new opportunities and challenges for market participants.

Embedded Lending and API-First Approaches: The future of software lending increasingly involves embedded financial products delivered through APIs. Forward-thinking lenders are developing platforms that allow software companies to offer financing directly to their customers, creating new revenue streams while deepening customer relationships. This embedded lending model benefits all parties: software companies gain a competitive advantage and additional revenue, their customers access convenient financing, and lenders reach new borrowers efficiently. Early implementations in vertical software markets showed promising results, with customer acquisition costs dropping by 60-70% compared to traditional origination methods.

Blockchain and Smart Contract Integration: While still early, blockchain technology shows promise for revolutionizing aspects of software lending. Smart contracts could automate covenant monitoring, payment processing, and even dynamic pricing based on performance metrics. Several pilot programs in 2024 demonstrated the potential for reduced operational costs and enhanced transparency. Challenges remain around scalability and regulatory acceptance, but the technology’s potential for reducing friction in lending processes appears significant.

AI-Powered Underwriting and Monitoring: Artificial intelligence will play an increasingly central role in software lending. Beyond current applications in data analysis, future AI systems will provide real-time risk assessment, predictive default modeling, and automated workout recommendations. Natural language processing will analyze vast amounts of unstructured data—from customer reviews to employee feedback—providing insights impossible through traditional analysis. As these systems mature, they’ll enable lenders to underwrite more accurately while reducing processing time and costs.

Sustainability-Linked Lending: Environmental, Social, and Governance considerations will increasingly influence software lending terms. Sustainability-linked loans, where pricing adjusts based on ESG performance metrics, gained traction in 2024 and appear poised for significant growth. Software companies achieving diversity targets, reducing carbon footprints through efficient coding practices, or demonstrating social impact may access better terms. This trend aligns lender and borrower incentives around long-term value creation beyond pure financial metrics.

Cross-Border Lending Platforms: The globalization of software markets demands more sophisticated cross-border lending solutions. Future platforms will seamlessly handle multi-currency transactions, navigate varying regulatory requirements, and manage geographic risks. Technology enabling real-time currency hedging, automated regulatory compliance, and standardized documentation across jurisdictions will unlock significant market expansion. Early movers in this space could capture outsized returns as software markets in emerging economies mature.

Revenue-Based Financing Evolution: The lines between traditional debt and revenue-based financing will continue to blur. Hybrid structures offering the upside participation of revenue-based models with the downside protection of secured debt gained popularity in 2024. Future innovations might include dynamic structures that automatically adjust based on company performance, providing flexibility during downturns while capturing upside during growth periods. These structures better align lender and borrower incentives, potentially reducing default rates while improving returns.

Democratization Through Technology: Technology will increasingly democratize access to software lending, both for borrowers and investors. Platforms allowing smaller investors to participate in software debt funds through tokenization or crowdfunding models showed early promise. For borrowers, automated underwriting and standardized processes will make debt accessible to smaller companies previously unable to access institutional capital. This democratization could significantly expand the addressable market while improving market efficiency.

Software Private Credit Asset Class

The 2024 software debt market represented a pivotal moment in the asset class’s evolution. What began as a niche financing option for venture-backed startups has matured into a sophisticated, multi-billion dollar market serving companies across the growth spectrum. The deployment of $27.7 billion across 2,077 transactions demonstrates not just market size, but depth and sophistication that rivals traditional lending markets.

Several key themes emerged from our comprehensive analysis:

Market Resilience: Despite macroeconomic headwinds, elevated interest rates, and venture capital market dislocation, the software debt market demonstrated remarkable resilience. Deal volume remained robust, credit quality stayed strong, and innovation in deal structures continued. This resilience reflects both the fundamental attractiveness of software business models and the sophistication of market participants who have learned from previous cycles.

Institutional Quality: The dominance of publicly-traded BDCs and institutional fund managers brought stability and professionalism to the market. These players’ scale, expertise, and access to diverse funding sources created a more stable lending environment than existed in previous cycles. The concentration among top lenders, while limiting competition in some ways, provided borrowers with certainty of execution and ongoing support.

Borrower Sophistication: Software companies increasingly view debt as a strategic tool rather than a last resort. The best companies proactively manage their capital structures, using debt to extend runway, fund specific initiatives, or bridge to value-creating milestones. This sophistication led to better outcomes for both borrowers and lenders, with lower default rates and more successful exits than in previous cycles.

Technology Integration: Both lenders and borrowers embraced technology to improve efficiency and decision-making. From AI-powered underwriting to real-time portfolio monitoring, technology transformed every aspect of the lending process. This integration will only accelerate, promising even greater efficiency and better risk management in the future.

Market Expansion: The software debt market’s geographic and sector expansion in 2024 laid groundwork for continued growth. As lenders gained comfort with diverse software models and international markets, the addressable opportunity expanded significantly. This expansion, combined with the ongoing shift from traditional bank lending, suggests substantial growth potential ahead.

Looking forward, several factors position the software debt market for continued expansion and evolution:

The ongoing digital transformation across industries ensures continued demand for software solutions, supporting borrower growth and debt service capacity. As interest rates potentially moderate from 2024 peaks, borrowing costs should become more attractive while still providing compelling lender returns. Continued innovation in deal structures will better align stakeholder interests and expand the universe of financeable companies. The maturation of the venture capital ecosystem creates natural demand for alternative financing options like debt. Finally, global expansion opportunities remain largely untapped, providing significant growth potential for sophisticated lenders.

For software companies, the evolved debt market provides valuable optionality in capital structure decisions. No longer must high-growth companies rely solely on dilutive equity financing. The availability of sophisticated debt capital from knowledgeable lenders creates flexibility to optimize capital structures for specific circumstances.

For investors, software debt represents an attractive asset class offering compelling risk-adjusted returns. The combination of strong borrower fundamentals, sophisticated underwriting, and protective structures creates an investment opportunity that fits well within diversified portfolios. As the asset class continues to mature and standardize, we expect increased institutional adoption and potentially improved liquidity through secondary markets.

The 2024 software debt market demonstrated that this financing method has moved from alternative to mainstream. As we enter 2025 and beyond, the continued evolution of market practices, expansion of participant bases, and integration of new technologies promise to make software debt an even more vital component of the innovation economy’s financial infrastructure. The foundations laid in 2024—from robust underwriting practices to sophisticated monitoring systems—position the market for sustainable growth that benefits all stakeholders.

In conclusion, the State of Software Debt in 2024 reflected a market coming of age. The combination of scale, sophistication, and innovation demonstrated throughout the year established software debt as a permanent and essential part of the capital markets. As technology continues to eat the world, the financing mechanisms supporting that transformation must evolve accordingly. The 2024 software debt market showed that this evolution is well underway, creating opportunities for companies, investors, and the broader innovation ecosystem that will define the next decade of growth.

Sources

The analysis in this report is based on comprehensive review of Q4 2024 10-K filings from the following publicly traded lenders:

• Ares Capital Corporation (NASDAQ: ARCC)
• FS KKR Capital Corp (NYSE: FSK)
• Blackstone Secured Lending Fund (NYSE: BXSL)
• Blue Owl Capital Corporation (NYSE: OBDC)
• Golub Capital BDC, Inc. (NASDAQ: GBDC)
• Hercules Capital, Inc. (NASDAQ: HTGC)
• Goldman Sachs BDC, Inc. (NYSE: GSBD)
• Sixth Street Specialty Lending, Inc. (NYSE: TSLX)
• Main Street Capital Corporation (NYSE: MAIN)
• Oaktree Specialty Lending Corporation (NASDAQ: OCSL)
• MidCap Financial Investment Corporation (NASDAQ: MFIC)
• Morgan Stanley Direct Lending Fund (NYSE: MSDL)
• Prospect Capital Corporation (NASDAQ: PSEC)
• Trinity Capital Inc. (NASDAQ: TRIN)

Raw data compiled from 10-K filings includes detailed loan-level information across all portfolio companies, origination dates, interest rates, exit fees, and industry classification.