What is venture debt, and when should you use it?

Venture debt is a type of financing that gives startups access to capital without giving up additional equity. Unlike venture capital, which trades ownership for funding, venture debt is structured as a loan — usually offered alongside or shortly after an equity round. For the right company, it can be a powerful tool to extend runway, fund growth, or bridge to the next milestone. But because debt comes with repayment obligations and potential legal pitfalls, founders should weigh it carefully against other funding options.

In this article, we walk you through the ins and outs of venture debt, including how it works and when to raise it.

Key takeaways

• Venture debt loans are 30-50% of your recent VC round and can help you extend your runway with minimal dilution. The capital can be used on anything you’d like.
• It’s important to choose a lending partner who will work with you through your startup’s ups and downs.

Venture debt (more specifically, venture term loans) refers to loans structured for startups that have raised venture capital.

Unlike traditional loans, which look for cash flow and other assets as indicators that a startup can pay their loan back, venture debt lenders focus on a company’s VC investors, its growth potential, and the possibility that it will be able to raise VC again. These lenders might also consider a company’s team, its performance history, and the market the company is targeting.

Venture debt works so closely with venture capital that many VC investors ask their portfolio companies to raise venture debt soon after a round. Venture debt is typically worth 30% to 50% of your previous round and can add cash to your existing fundraise without diluting you — or your investors — too much.

Remember: Venture debt isn’t just free cash. Like commercial loans, venture term loans need to be repaid with interest over time.

Venture lenders also ask for compensation in the form of stock warrants, which dilute your company by a very small amount (typically less than 0.5%). Warrants work like the equity you might give out to employees—they give your lender the option to buy a small portion of your company at a later stage, valued at the time that the loan was created.

Venture debt is often considered to be a repeatable loan — not a one-time expenditure. Many companies work with their lenders as they grow and refresh their loans over time. For that reason, it’s important to choose a venture debt provider that can act as a partner as you continue to grow and raise VC.

1. Your startup must be venture-backed
   Venture debt is only available to startups that have recently raised venture capital. Lenders typically provide loans within 12 months of a completed equity round. The stronger and more reputable your investors, the easier it is to secure favorable terms.
2. Loan sizes and structure vary
   Venture debt typically ranges from 10–50% of your most recent VC round, depending on your stage, investor backing, and lender type. Interest rates often fall between 8–12%, with warrants in the range of 0.5–5% of company equity. Some lenders offer interest-only periods of 12–18 months, giving you flexibility in the early months of repayment.
3. Venture debt is minimally dilutive but still a legal obligation
   Unlike equity, venture debt must be repaid. While dilution is small — primarily from warrants — failure to meet repayment terms can trigger lender rights. Legal terms to watch include material adverse change clauses, early warrant exercises, or other covenants that could accelerate repayment under certain conditions.
4. Venture debt is often used to extend runway and hit milestones
   This type of financing is typically leveraged to reach key milestones before your next equity raise — such as hiring critical talent, completing product development, or scaling marketing efforts. Using venture debt strategically can help you avoid down rounds and maintain more equity for founders and existing investors.

Venture debt isn’t a fit for every company, but it can be a powerful complement to equity funding when used strategically. 

The best time to raise venture debt is when you’re coming off a position of strength — usually right after closing a venture round — and you want flexible capital to extend your runway, hit milestones, or lower your blended cost of capital. Common scenarios include:

• You’ve just raised venture capital (or are about to).
  Term loans are only available to startups that have raised equity. Many lenders expect you to close debt financing within 3–12 months of an equity raise. Talking to lenders early means you can move quickly once your round closes.
• Your investors are strong and well-known.
  Lenders lean heavily on the signal of your backers. If your investors have a track record of supporting companies through multiple rounds, it improves your odds of securing favorable terms.
• You can commit to repayment.
  Venture debt requires fixed monthly payments. Some providers (like Mercury) let you draw down gradually and offer interest-only periods up to 18 months, but you’ll need a realistic plan for repayment that doesn’t crowd out growth spending.
• You want to extend your runway.
  Runway is the time until your cash runs out. Venture debt helps you add 6–12 months of breathing room, which can position you for a stronger raise, IPO, or profitability push.
• You want to hit specific milestones before raising again.
  Missing a milestone can mean a down round. Debt can fund critical hires or product launches that help you raise at a higher valuation. For example, if you raised a $3M seed at 15% dilution but need $1M more to ship your Android app, a loan can get you there with only ~0.25% additional dilution.
• You want flexible capital.
  Unlike traditional loans, venture debt usually isn’t tied to specific use cases. You can deploy it like equity — on hiring, marketing, or product development — wherever it accelerates growth.

Want to explore whether venture debt fits your plan? Learn about Mercury’s Venture Debt offering.

Make sure you’re incorporated. Your startup must be incorporated — the loan will be disbursed into your startup’s bank accounts and business bank accounts require incorporation.

Timing is everything—negotiate from a position of strength. Turn to venture debt lenders right after you’ve completed a major fundraising round. This is when you’ll have the most leverage.

Talk with your current investors. While most startups take on venture debt, taking too much or taking money from the wrong lender can hurt your future venture capital prospects. Investors typically don’t want to see a large portion of the money they’ve invested being used to repay old debt. Plus, restrictive covenants may limit the operational flexibility of your startup. Make sure to discuss any debt undertaking with your current investors first — especially if they’re same ones that will participate in your next round.

Get a lawyer. Venture debt can be complicated and many of its downsides come from misunderstanding term sheets. For example, some lenders may ask for the right to exercise their warrants before your company undergoes a liquidity event. Other lenders add in material adverse change clauses, which allow them to not fund the loan or ask for immediate repayment if a company is going through hardship. Get a lawyer early who can guide you through these questions.

Common law firms include:

• Goodwin Procter
• Fenwick
• Orrick
• Cooley
  

Find a lender. Both banks and non-bank lenders can provide venture debt. The bank lenders are typically specialized banks used to dealing with startups, while non-bank lenders are usually venture debt funds.

There are crucial differences between the way bank and non-bank lenders are structured that influence the terms of venture term loans.

One key difference is how lenders fund the capital they loan out. While banks fund their loans from deposits, debt funds source it from other investors—these investors will expect a certain return on their own investment. As a result, venture term loans from banks are typically cheaper than those from venture debt funds. Debt funds may also ask for bigger warrants to meet their own targets.

Observe when the negotiation shifts from term sheet to final loan documents. With some lenders, term sheets are not fully representative of final deal terms. For instance, covenants are often only referenced at the surface level—and specific asks only emerge when lenders search for final loan documents. Keep an eye out for these, run sheets through with your lawyer, and don’t be afraid to negotiate.

Think deeply before you select your provider. Remember, while venture debt can be immensely helpful to your startup’s growth, it does impose a legal and financial obligation. It’s essential to select the right provider and negotiate your agreement.

If you’re taking venture debt from a bank, you’ll be expected to move most — if not all — of your banking over to them. Are you willing to work with your lender’s bank?

Additionally, consider what type of relationship you’re looking for with your venture debt provider — are you looking for a vendor or a long-term partner?

A partner can be especially helpful if you run into trouble and are unable to repay your loan. They might be more amenable to restructuring your loan and giving your company enough time to get back on its feet. On the other hand, a vendor may be more inclined to impose penalty costs or move straight toward liquidating your collateral (which would be the end of your business).

Remember: Many startups return to their providers throughout the course of their journey. Having a partner on your side can pay off in the long run.

A term sheet is a non-binding agreement that a venture debt lender will give you when they’re considering an investment.

This sheet will set the terms of your deal, including the size of your loan, your interest rate, and the warrants that your lender will take. It will also set the tone for your company’s future, whether it’s when you take on your next VC round or when you’re looking at other forms of financing. It can — and should — be negotiated.

Read about the most important terms to know before negotiating and signing a venture debt term sheet.