This article is written by guest contributor Kal Jamshidi, Managing Director at Mighty Partners .
What is venture debt?
Venture debt, also referred to as growth credit or debt financing, is a type of business funding that is provided as a loan, paid back with interest over an agreed term. This differs from equity financing or venture capital, where funds are provided in exchange for ownership in a company.
Growth credit is typically accessed via private specialist lenders in Australia. Loan structures are specifically designed for startups and other high-growth companies, focused on future revenue potential and flexible repayment, rather than relying solely on hard assets or long trading history.
Some banks also offer debt facilities, but they typically have stricter credit criteria, meaning they are unattainable for many startups and SMEs, and heavier security requirements.
The main benefit is that its non-dilutive, so companies can keep hold of their equity, and future value or upside, as they grow.
Who is venture debt suitable for?
Businesses need to be generating steady revenue to be able to access debt financing, due to the nature of needing to be repaid. Whilst you don’t need to be profitable, your business needs to show signs of growth to give the lender comfort in your ability to service the loan over its term.
This means that venture debt is best suited to more mature startups and SMEs, with proven product market fit, steady revenue and clear growth.
Common venture debt / growth credit structures
Here’s a breakdown of how a typical growth credit facility is structured.
- Facility size: the total amount of capital that can be accessed.
- Drawdowns: a drawdown is when you access funds from an approved loan or credit facility. Borrowers can typically choose from taking the full amount up front or in smaller instalments as you need it. Sometimes a business must meet a requirement to access future drawdowns.
- Term: the period in which the agreement is for.
- Repayment schedule: typically choose between equal monthly repayments or an initial interest only period.
- Fees: fees typically include the headline interest rate and an establishment fee up front. Fees will vary by lender, and some may include additional clauses such as early repayment fees, so it is important to make sure you understand all fees before entering into an agreement.
- Covenants: a condition set by a lender that the borrower must meet for the duration of a loan e.g. maintaining certain financial ratios, providing reports, or keeping debt below a set level.
- Warrants: some lenders may include a warrant component. This is where the lender is given the right (but not obligation) to buy shares in a company at a set price within a certain time frame. In growth credit or venture debt, lenders sometimes take warrants as part of the deal so they can share in future equity upside if the company grows significantly. This makes the facility slightly dilutive, though far less so than a full equity raise.
- Security: requirements may vary by lender but specialist lenders typically take a general business security and don’t require any personal guarantees.
What are the benefits?
Among the many different business funding methods available to growing firms, growth credit provides some unique benefits.
- It gives businesses access to meaningful capital without giving up significant ownership.
- It can be tailored to match cash flow, with options like interest-only periods and staged drawdowns, and is often faster and more flexible than bank lending.
- For high-growth companies, it can extend runway, fund expansion or acquisitions, and bridge the gap to profitability or a future equity raise.
What are the challenges and considerations?
The main challenges with growth credit are the higher cost compared to traditional bank loans and the need to meet repayment obligations regardless of business performance. Lenders may require security over assets or impose covenants, and taking on debt can limit flexibility if cash flow tightens. It’s important to model different scenarios to ensure the facility remains manageable.
Seek advice to fund your business goals
When you have proven product market fit and are generating steady and growing revenues in your business, growth credit can be a very powerful tool to help you scale without giving up significant equity. It’s important to remember though that debt comes with obligations, and you should be confident your business can comfortably meet them.
If you’re weighing up funding options for your next phase of growth, it can be valuable to work with a specialist advisor. They can help you compare structures, run scenarios, and ensure two things: first, that you choose the right type of capital for your business at that point in time, and second, that the obligations attached, whether debt repayments, bank covenants or performance milestones from a VC, remain manageable.
With expertise across the full spectrum of financing, BlueRock's accounting and advisory team gives you a clear view of your funding choices and helps you make the best decision for your business. Ask your accountant if working with a firm like Mighty Partners could be an option for your growth plans.
