Venture Debt: How It Works, Costs & When to Use It

Venture debt is one of the most misunderstood financing tools in the startup world. Used correctly, it extends your runway without significant dilution. Used incorrectly, it adds fixed obligations to a business that may not be ready for them.

This guide breaks down how venture debt works, what it costs, who qualifies, and when it makes sense — along with a direct comparison to revenue-based financing so you can choose the right option for your SaaS company.

What Is Venture Debt?

Venture debt is a type of loan designed specifically for venture-backed startups. Unlike traditional bank loans that require profitability and physical collateral, venture debt lenders underwrite based on your company’s equity backing, growth trajectory, and the likelihood of a future fundraise.

The basic structure: a lender provides a term loan — typically 20-35% of your most recent equity round — with interest payments over a 2-4 year term. In addition to interest, most venture debt deals include warrants, which give the lender the right to purchase a small amount of equity (usually 0.5-2%) at a predetermined price.

According to JPMorgan’s venture lending research, the U.S. venture debt market peaked at $38.8 billion in 2021. While deal volume has declined since then, the market remains active, with median deal sizes ranging from $2.5 million to $5.3 million and upper-quartile deals reaching nearly $29 million.

How Does Venture Debt Work?

Venture debt is typically structured as a term loan with several components that differentiate it from traditional lending:

Loan amount: Usually 20-35% of your last equity round. If you raised a $10M Series A, you might qualify for $2M-$3.5M in venture debt.

Interest rate: Typically 8-15% annually, depending on the lender, your stage, and market conditions. This is higher than traditional bank rates but reflects the higher risk profile of growth-stage startups.

Term length: Most venture debt facilities run 2-4 years. Many include an initial interest-only period of 6-12 months before principal repayment begins.

Warrants: Lenders typically receive warrant coverage of 0.5-2% of the company’s equity. This is the “equity kicker” that compensates the lender for the additional risk. While this creates some dilution, it’s far less than a full equity round.

Covenants: Most venture debt agreements include financial covenants — minimum cash balance requirements, revenue milestones, or restrictions on additional debt. Violating covenants can trigger default provisions, so review these carefully before signing.

Draw period: Some facilities offer a draw period (typically 6-12 months) during which you can access the funds as needed rather than taking the full amount upfront. This reduces your interest costs since you only pay on the drawn balance.

Types of Venture Debt

Not all venture debt is structured the same way. The three most common types serve different purposes:

Growth Capital Loans

The most common type of venture debt. Growth capital loans fund expansion — hiring, marketing, product development — and are repaid over 3-4 years. These typically have an interest-only period followed by principal amortization.

Bridge Loans

Short-term debt (6-12 months) designed to bridge the gap between equity rounds. Bridge loans carry higher interest rates but provide critical runway when you need a few more months to hit the milestones that will make your next round more attractive.

Equipment Financing

Loans secured against specific assets — servers, hardware, or other equipment. Less common for SaaS companies but relevant for those with significant infrastructure needs. These typically have lower interest rates because the equipment serves as collateral.

Advantages of Venture Debt

Venture debt offers several compelling benefits for the right company at the right stage:

Minimize dilution: The primary draw. Instead of raising additional equity and giving up 15-30% ownership, venture debt extends your runway with only 0.5-2% warrant dilution. For founders who believe their company’s valuation will increase significantly, this preserves substantial value.

Extend runway between rounds: Venture debt can add 6-12 months of runway beyond what your equity raise provides. This extra time lets you hit key milestones — a revenue target, a product launch, a key hire — that strengthen your position for the next fundraise.

Improve negotiating leverage: With more runway, you negotiate from a position of strength. You’re not forced to accept unfavorable terms because you’re running out of cash.

Tax-deductible interest: Unlike equity, interest payments on venture debt are typically tax-deductible, reducing the effective cost of capital.

Venture Debt Example

Let’s say your SaaS company just closed a $10M Series A. A venture debt provider offers:

Loan amount: $3M (30% of Series A)
Interest rate: 11% annually
Term: 3 years with 6-month interest-only period
Warrants: 1% equity coverage

During the 6-month interest-only period, your monthly payment is $27,500 ($3M × 11% ÷ 12). After that, the full $3M principal amortizes over the remaining 30 months, and monthly payments increase to roughly $115,000 (principal plus interest).

Total interest paid over the life of the loan: approximately $610,000. Plus 1% warrant dilution. Compare that to raising an additional $3M equity round at the same valuation — you’d give up roughly 7-10% of your company, which at a $100M exit would be worth $7-10M. The venture debt cost you roughly $610K in interest plus 1% dilution — a fraction of what equity would cost.

Disadvantages of Venture Debt

Venture debt isn’t without risks. Understanding the downsides is essential:

Requires existing VC backing: Most venture debt lenders won’t lend to companies that haven’t raised institutional equity. The lender’s primary repayment thesis is often that you’ll raise another equity round. If you’re bootstrapped, venture debt typically isn’t an option.

Fixed repayment obligations: Unlike equity (no repayment) or revenue-based financing (flexible payments), venture debt requires fixed monthly payments regardless of how your business is performing. In a downturn, these payments don’t adjust.

Covenant risk: Violating financial covenants can trigger default, acceleration of repayment, or loss of the facility. This risk is amplified if your growth slows unexpectedly.

Warrants dilute ownership: While the dilution is small (0.5-2%), it’s not zero. And if your company grows substantially, those warrants can become expensive in retrospect.

Can mask underlying problems: Venture debt extends runway, but it doesn’t fix a broken business model. If the reason you need more capital is that your unit economics don’t work, debt just delays the reckoning — with interest.

Venture Debt vs Revenue-Based Financing

For SaaS companies with strong recurring revenue, revenue-based financing (RBF) is often a compelling alternative to venture debt. Here’s how they compare:

Factor	Venture Debt	Revenue-Based Financing
Who qualifies	VC-backed companies	Any company with $10K+ MRR
Funding amount	20-35% of last equity round	1-4x monthly recurring revenue
Interest / cost	8-15% + warrants	Flat fee (12-30% annualized equivalent)
Equity dilution	0.5-2% (warrants)	None
Repayment	Fixed monthly (interest + principal)	Flexible — tied to revenue
Covenants	Financial covenants common	Minimal or none
Personal guarantee	Sometimes required	Not required
Speed to funding	4-8 weeks	24-48 hours
Best for	Extending runway between equity rounds	Growth capital for any SaaS company

The key difference: Venture debt requires VC backing and comes with fixed repayment obligations. Revenue-based financing is accessible to any SaaS company with recurring revenue — bootstrapped or VC-backed — and payments flex with your performance.

If you’re a bootstrapped SaaS company, venture debt likely isn’t available to you. Revenue-based financing provides similar benefits (non-dilutive capital, fast funding) without requiring institutional backing.

If you’re VC-backed, both options work — but consider whether you want fixed payments (venture debt) or flexible ones (RBF). Many founders use both: venture debt for large, milestone-driven capital needs, and RBF for more immediate, growth-oriented spending.

Venture Debt vs Equity Financing

The venture debt vs equity decision comes down to what you’re optimizing for:

Factor	Venture Debt	Equity (VC)
Ownership impact	0.5-2% dilution (warrants)	15-30% dilution per round
Board control	No board seats	Board seats + approval rights
Repayment	Monthly payments required	No repayment — exit-dependent
Cash flow impact	Reduces monthly cash flow	Preserves cash flow
Risk if business struggles	Default, acceleration of debt	Down round, but no default risk
Best for	Extending runway 6-12 months	Large capital needs ($5M+)

Most founders don’t choose one or the other — they use both strategically. The common playbook: raise an equity round for the major capital injection, then layer on venture debt to extend runway and hit milestones that increase your next-round valuation.

Top Providers

The venture debt market includes banks, specialty lenders, and funds. Here are the most active providers:

Banks:

First Citizens Bank (formerly SVB): The largest venture debt lender by market share. Offers growth capital and working capital lines for VC-backed companies.
JPMorgan Chase: Expanded its venture lending practice significantly. Strong fit for later-stage companies with institutional banking needs.
Comerica: Long history in technology lending, particularly in the early-to-mid-stage startup segment.

Specialty lenders:

Hercules Capital: One of the largest publicly traded venture debt providers. Focuses on technology, life sciences, and sustainable industries.
Western Technology Investment (WTI): One of the oldest venture lenders, focused on growth-stage technology companies.
TriplePoint Capital: Provides venture lending to VC-backed companies from early to late stage.
Trinity Capital: Specializes in growth-stage venture lending with equipment financing options.

When to Use Venture Debt

Venture debt makes the most sense in these specific situations:

Extending runway after an equity round: You just closed a Series A or B and want 6-12 extra months to hit milestones that will increase your Series B or C valuation. This is the classic venture debt use case.

Bridging to profitability: You’re close to cash flow breakeven and need a final push without another dilutive equity round.

Funding a specific initiative: A large customer contract, an acquisition opportunity, or a geographic expansion that has a defined ROI — venture debt lets you fund it without raising a full equity round.

Avoiding a down round: If market conditions have depressed valuations, venture debt lets you extend your runway until conditions improve rather than raising equity at an unfavorable valuation.

When NOT to Use It

Venture debt is the wrong tool in these scenarios:

You haven’t raised equity: Most venture debt lenders require institutional VC backing. If you’re bootstrapped, look at revenue-based financing or other non-dilutive options instead.
Your burn rate is unsustainable: If the business can’t reach profitability or the next funding milestone within the debt’s term, you’re just piling on obligations.
Unit economics aren’t proven: Debt accelerates outcomes — good or bad. If you’re still in the early stages of building your SaaS startup and searching for product-market fit, equity is the right risk capital.
You need the money to survive, not grow: Venture debt should fund growth, not keep the lights on. If you’re using debt to cover basic operations, the underlying business needs fixing first.

How to Get Venture Debt

The process for securing venture debt typically follows these steps:

Timing: The best time to raise venture debt is within 6-12 months of closing an equity round, when your balance sheet is strong and your runway is long. Lenders offer better terms when you’re not desperate for capital.
Prepare your materials: You’ll need a pitch deck, financial model, cap table, and investor references. Venture debt due diligence is lighter than equity but still thorough.
Talk to multiple lenders: Get term sheets from at least 2-3 providers. Compare not just the interest rate but the full package: warrants, covenants, draw period, prepayment terms, and the lender’s reputation for working with companies through difficulties.
Negotiate terms: Key areas to negotiate include warrant coverage (lower is better), covenant flexibility, interest-only periods (longer is better), and prepayment penalties (none is best).
Close and draw: Once terms are agreed, closing typically takes 2-4 weeks. If your facility includes a draw period, plan your draws strategically to minimize interest costs.

FAQ

What is venture debt?

Venture debt is a loan designed for venture-backed startups. It provides capital without the significant equity dilution of a traditional fundraise, typically structured as a term loan with interest payments plus small warrant coverage (0.5-2% equity).

How much can I raise?

Most venture debt facilities are sized at 20-35% of your most recent equity round. If you raised a $10M Series A, you might qualify for $2M-$3.5M in venture debt. Median deal sizes in the U.S. range from $2.5M to $5.3M.

Do I need VC backing?

In most cases, yes. Venture debt lenders underwrite based on your company’s equity backing and the expectation of future fundraises. If you’re bootstrapped, revenue-based financing is a better fit — it requires only recurring revenue, not VC backing.

How does it compare to revenue-based financing?

Venture debt requires VC backing and has fixed repayment schedules with warrants. Revenue-based financing is available to any company with recurring revenue, has flexible payments that adjust with your revenue, and involves zero equity dilution. See our full comparison of SaaS financing options.

When is the best time to raise it?

Within 6-12 months of closing an equity round. Your balance sheet is strongest at this point, and lenders will offer the best terms. Waiting until you’re running low on cash results in worse terms or denial.

The Bottom Line

Venture debt is a powerful tool for VC-backed startups that want to extend runway without significant dilution. But it’s not the only non-dilutive option available to SaaS companies.

If you’re bootstrapped or don’t want the fixed repayment obligations and covenants that come with venture debt, revenue-based financing offers a more flexible alternative. Founderpath provides non-dilutive growth capital for SaaS companies with $10K+ MRR — no VC backing required, no warrants, no covenants, and funding in 24-48 hours instead of weeks.

Check what you qualify for — connect your revenue data in under 5 minutes and receive a funding offer within 24 hours.