Venture debt is a loan made specifically to companies that already have (or are closing) venture equity, priced against the equity rather than the balance sheet.
Why lenders will lend to unprofitable companies
The security is not your assets — startups rarely have any worth repossessing. It is the investors behind you: lenders assume that a company with a strong syndicate can raise again, and size the loan accordingly. That is why the question 'when did you close?' matters more than 'what is your EBITDA?'
The typical structure is 24 to 36 months of interest-only payments, with the principal due at maturity as a bullet. Warrant coverage of 5 to 15 percent of the loan value sweetens the lender's return — priced at the last round's price per share, or a fixed dollar value.
When venture debt makes sense
The three good uses: extending runway between rounds to hit a higher valuation, bridging a signed contract to cash collection, and financing capital equipment that produces revenue before it is paid off. The common thread is a clear, dated path to repayment.
- Runway extension with a milestone in sight
- Bridge a signed customer contract to payment
- Equipment that pays for itself inside the term
- Avoiding a down round priced in desperation
The covenant trap
Read the covenants before the rate. Venture loans often carry minimum-cash covenants — if your bank balance falls below a line, the loan is in default even if you are current on payments. A covenant breach in month 23 can convert a helpful loan into a forced refinance at the worst possible time.
BDC Capital and Export Development Canada both run venture-debt programs aimed at Canadian tech, often with gentler covenant packages than the private funds. For a first loan they are a reasonable place to start.
Frequently asked questions
Is venture debt cheaper than equity?
In dilution terms, usually yes — a warrant strip costs far less than the same dollars in shares. In cash terms it is more expensive than a bank loan, which is why it is priced against equity as the alternative.
Can I get venture debt without investors?
Rarely. Lenders underwrite the syndicate, so a bootstrapped company is usually better served by revenue-based financing or a conventional term loan.
Sources
Connectica provides information only, not financial, investment, legal or tax advice. Figures on this page are estimates and generalizations — confirm anything that matters with the relevant professional or authority.