Unlocking Growth: A Startup’s Essential Guide to Venture Debt Financing (2025)

Between rising costs and tight funding markets, entrepreneurs are exploring every financing option available. While venture capital gets most of the attention, there’s another tool in the startup funding tool kit that’s worth understanding: venture debt.

This specialized form of lending can complement your equity financing strategy, helping you extend your runway and potentially secure better terms on future funding rounds. But like any financial tool, it comes with both advantages and risks you need to understand.

Here’s what to know about venture debt, the pros and cons, and which companies are best suited to use it to raise capital.

What is venture debt?

Venture debt is a type of loan offered to early stage companies that are typically backed by venture capital. Think of it as a complement to equity financing, not a replacement.

You can use venture debt financing for the same purposes as equity financing: paying expenses, funding product development, hiring employees, and covering other short-term operating costs. Unlike traditional bank loans, venture debt offers more flexible repayment terms—including initial periods where you only pay interest, not principal—and typically requires little to no collateral. These factors make it particularly attractive for early stage startups that may be cash-strapped.

Typically, the money is provided by lenders who specialize in venture debt—or banks with venture arms that work with higher-risk businesses like startups—in the form of term loans or lines of credit. The amount tends to be about 20% to 35% of the amount raised in the most recent equity funding round, according to Carta. You’ll need to repay the funds with interest according to your loan agreement.

Benefits of venture debt financing

• Less ownership dilution
• Extends timeline to next equity raise
• Provides a buffer in tight fundraising conditions

Venture debt financing offers several advantages over equity and other financing forms:

Less ownership dilution

This is venture debt’s major upside. With equity financing, investors fund your company in a direct exchange for partial ownership. When you give up shares, you dilute your ownership, meaning you own less of your company. With debt financing, however, you’re borrowing money—not directly giving up company ownership.

Note that while venture debt involves no immediate equity exchange, it could involve some equity dilution later. That’s because many venture debt deals include warrants that give the venture lender the right to buy equity at a fixed price within a specific time frame in the future. The investor can exercise the warrant and buy shares at the strike price at any point before the expiration date.

Warrants incentivize venture debt lenders to make these riskier deals with early startups, providing them with potential future upside if your company’s value increases significantly. This setup generally creates less ownership dilution than a pure equity deal—but it’s still more than zero.

Extends timeline to next equity raise

Depending on your financials, venture debt can provide several months to a year of a cash runway without raising a new equity round. This gives you additional time to expand the company, improve your product, and hit key performance indicators (KPIs) like higher annual recurring revenue—which might justify a much higher valuation for your next equity financing round.

Provides a buffer in tight fundraising conditions

There’s another major reason you might want to extend the time between equity rounds: The venture capital world often fluctuates based on broader economic conditions. Venture capital investors often tighten their wallets in uncertain times—think the peak of the pandemic or an economic recession.

In those tight conditions, venture debt can function as insurance. It can provide some breathing room so you’re not forced to raise equity in a poor environment or from a position of weakness.

Cons of venture debt financing

• Must be repaid, often at high interest rates
• May come with strings attached
• Overuse is a red flag

Must be repaid, often at high interest rates

Like any standard loan, you’ll need to pay back the money you borrowed, plus interest, within the time frame detailed in your agreement. This recurring cost can pressure your cash flow, especially if you miss financial projections, your sales are unpredictable, or there’s a broader economic downturn. 

Repayment schedules for venture lending typically run three to four years. Some deals do, however, include a provision allowing you to pay only interest on the loan—no principal payments—for the first six to 12 months. Typically, you’ll get the money for repayment when you raise additional capital in your next equity funding round.

Interest rates for venture debt often run higher than traditional bank loans or lines of credit: about 7% to 12%, according to Silicon Valley Bank. You may also pay an upfront fee to secure the deal and a final payment fee when you close out the loan. 

May come with strings attached

Beyond interest rates and repayment schedules, your venture debt loan terms may include conditions called covenants.

These covenants may dictate that your company hit certain growth milestones, sales goals, or other metrics. If you fail to meet them, you may face consequences like higher interest rates—or you may even be considered in default on the loan.

Overuse is a red flag

Venture debt is truly meant to complement venture capital—a stepping stone to the next equity funding round. Over-reliance on debt can be a turnoff for investors and a signal that you’re having trouble raising capital.

When do companies typically consider venture debt?

Companies that seek venture debt are generally earlier-stage startups experiencing fast growth. Typically, venture debt providers want to see that your company has raised equity capital already, as this provides a cushion and shows that other investors believe in your potential.

Most venture debt fundraising happens after you’ve raised at least seed funding—generally before, during, or after Series A or Series B equity funding rounds. Lenders typically expect you to show some cash runway from your last fundraise, healthy financial performance, and at least some market traction.

Lenders also like to see that you have a clear use for the funds, especially something with a predictable return on investment, like marketing or hiring key staff. Venture debt is not meant to be a survival tool, and you must be prepared to repay the loan through proceeds from a future equity fundraising round or other revenue.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months, based on sales.