Arron Bennett, Founder of Bennett Financials
A few weeks after a Series A closes, the term sheets start arriving. Not from investors. From lenders. "Add $3 million of runway with minimal dilution." It sounds like free time.
It isn't free, and it usually isn't as much time as it sounds. Venture debt can be a smart tool for a SaaS company with strong unit economics and a clear plan. It can also turn a slow quarter into a crisis, because a lender, unlike an investor, can ask for the money back.
This post covers how venture debt works, how much runway it really adds, a short Python model you can run on your own numbers, and the terms that make it dangerous.
Key takeaways
- Venture debt is a term loan for venture-backed companies, usually with an interest-only period, then monthly principal payments, plus fees and warrants.
- It adds less runway than the headline suggests, because repayments start before most companies raise again.
- It's cheapest and safest when it funds growth with a known payback, not when it's the plan for survival.
- Read the covenants and the default clauses before the interest rate. They decide how dangerous the loan is.
What is venture debt?
Venture debt is a loan to a venture-backed startup, usually sized as a fraction of the last equity round. Typical terms include an interest-only period, then monthly principal repayments, a final payment fee and warrants that give the lender a small right to buy equity. It costs less dilution than equity, but it must be repaid on schedule whatever happens to growth.
Lenders lend because your investors just backed you. The equity round is their comfort. That's also why the timing of your next round matters so much.
How do venture debt terms work?
Most venture debt offers have the same moving parts:
- Draw period: how long you have to take the money.
- Interest-only period: months where you pay only interest.
- Amortization: after interest-only ends, principal is repaid in equal monthly amounts.
- Final payment fee: a percentage of the loan paid at the end.
- Warrants: a right for the lender to buy a small amount of equity.
- Covenants: rules you must keep, such as a minimum cash balance or revenue targets, plus default clauses like a "material adverse change" clause.
The interest rate gets the attention. The covenants and default clauses decide what happens when things go wrong.
How much runway does venture debt really add?
Less than cash ÷ burn suggests. Interest starts on day one, and principal payments usually begin twelve months or so later, often right when you'd be raising the next round. This model shows the effect. It's simplified: fixed rate, the loan drawn on day one, flat net burn.
def runway_months(cash, net_burn, loan=0.0, rate=0.11, interest_only=12,
amort_months=30, final_fee=0.04):
"""Months until cash runs out, with an optional term loan drawn today."""
cash += loan
balance, month = loan, 0
while True:
month += 1
interest = balance * rate / 12
principal = 0 if month <= interest_only else min(balance, loan / amort_months)
out = net_burn + interest + principal
if loan and month == interest_only + amort_months:
out += loan * final_fee
if out > cash:
return month - 1 + cash / out # fraction of the last month
cash -= out
balance -= principal
print(f"No debt: {runway_months(8_800_000, 400_000):.1f} months")
print(f"$3M loan: {runway_months(8_800_000, 400_000, loan=3_000_000):.1f} months")
Output:
No debt: 22.0 months
$3M loan: 24.8 months
Swap in your own cash, burn and the terms on your offer. Then add a version where burn rises, because it usually does once the money lands.
What does that look like for a real SaaS company?
Here's a hypothetical example. Every number is made up to show the mechanics.
A Series A observability SaaS has $4.1 million in ARR, $8.8 million in the bank and $400,000 a month of net burn. That's 22 months of runway. A lender offers $3 million: 11% interest, 12 months interest-only, 30 months of principal repayments, a 4% final payment fee and warrants.
Naive math says $3 million is 7.5 more months. The model says 2.8.
- Interest over the life of the loan comes to about $756,000.
- The final payment fee is $120,000.
- At month 22, when the company would have run out of cash without the loan, it still owes $2 million.
So the founders would pay about $876,000 in interest and fees, plus warrants, for under three extra months, and enter their Series B process with $100,000 a month of principal going out the door.
That doesn't make the loan a bad idea. It makes it a bad idea for buying time. It can be a good idea for buying growth.
When is venture debt a good idea?
Venture debt works best when it funds something with a known, fast payback. If every dollar of sales and marketing comes back within twelve months and customers stay for years, borrowing to spend more of those dollars sooner can be cheaper than raising equity for it.
This video isn't about venture debt. It's about the moment when holding cash back costs more than spending it, which is the same test I'd apply to borrowed money.
It's also reasonable as insurance: drawn only if a round takes longer than planned, with terms that allow that. Some lenders let you draw later in the draw period, which keeps interest down until you need the money.
When does venture debt turn dangerous?
It turns dangerous when growth slows and the loan's rules start to bite. Watch for:
- Minimum cash covenants. A covenant that requires you to keep, say, a set amount of cash in the bank shrinks your usable runway by that amount.
- Revenue or performance covenants. Miss a target and you're in default, even if you're paying on time.
- Material adverse change clauses. Broad wording can let the lender call the loan if they decide your prospects worsened.
- Repayments that start before the next round. If principal starts at month 12 and your raise slips to month 20, you're repaying debt with the cash meant to get you there.
- Banking requirements. Many lenders require your operating accounts at their bank. After the 2023 bank failures, founders understand why that concentration matters.
A default doesn't mean the lender takes the company the next morning. It does mean the conversation is on their terms, at the worst possible time.
What should you do on Monday?
Run the model with your real cash, burn and offer terms. Then run it again with burn 20% higher and your next round six months late. If the loan only works in the first version, don't sign it. If you go ahead, send the covenants, default clauses and warrant terms to your lawyer before you negotiate the rate. If you're also weighing other non-dilutive options, I've written about how a line of credit and its borrowing base work.
FAQ
Is venture debt cheaper than equity?
Usually less dilutive, not always cheaper. Interest, fees and warrants are real costs, and repayments compete with growth for cash. It's cheapest when it funds growth with a fast, proven payback.
When should a startup take venture debt?
Typically soon after an equity round, while the company has plenty of cash and the lender is comfortable. Taking it when you're already low on cash usually means worse terms.
What are warrants in venture debt?
A right for the lender to buy a small amount of equity, usually at the last round's price. It's a small dilution, but it's part of the cost.
Can venture debt be repaid early?
Often, yes, but many loans charge a prepayment fee. Check the terms before you assume you can refinance or repay after your next round.
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