Growth Debt FAQ
What is Growth Debt?
Growth Debt is a type of financing designed for rapidly scaling companies that need additional capital without significant equity dilution.
What are the benefits of Growth Debts?
Growth Debt provides quick access to capital, helps founders maintain greater control over equity, and extends cash runway. By reducing dilution from equity funding, it bridges funding rounds effectively and prevents raising capital at lower valuations than previous rounds. It also enables companies to accelerate growth initiatives, increasing their value before the next equity raise.
What companies consider Growth Debt?
Growth Debt is best suited for startups or scale-ups – often VC-backed – that have moved beyond the seed stage, achieved product-market fit, and are experiencing double-digit revenue growth, ideally exceeding €5 million in annual revenue.
Are there any covenants with Growth Debt?
Yes, but Growth Debt covenants are typically more flexible than traditional bank loans, offering lender protection while allowing startups to grow. Loan agreements generally include:
- A) Financial Covenants – e.g., Minimum Cash Balance, Minimum Revenue
- B) Operational Covenants – e.g., Limitations on the Use of Proceeds
- C) Reporting Covenants – e.g., Financial Reporting Requirements
Can Growth Debt be used alongside equity financing?
Yes, Growth Debt often complements equity financing rather than replacing it. Startups typically raise Growth Debt immediately after or alongside an equity round, leveraging the equity funding to secure more favourable debt terms.
How long is the typical process of securing Growth Debt?
Securing Growth Debt typically takes 8 to 16 weeks, depending on the business and due diligence requirements. It is usually faster than raising equity, allowing companies to capitalise on growth opportunities more quickly.
How does Growth Debt compare to traditional bank loans?
Growth Debt is tailored for high-growth companies, offering more flexibility than traditional bank loans, which require a strong credit history, stable cash flow, collateral, and strict covenants. However, due to the higher risk of startups and scale-ups, Growth Debt carries higher interest rates and often includes risk-compensating components, such as equity warrants.
How does Growth Debt impact future fund-raising?
When used wisely, Growth Debt can enhance fundraising by helping startups reach key milestones, leading to higher valuations and less dilution. However, excessive debt may deter investors, strain cash flow, and limit future funding options. At a reasonable level, VCs generally view it as a strategic tool to extend runway and strengthen the business.
What are the typical repayment terms for Growth Debt?
Growth Debt usually features an initial interest-only period with minimal amortisation, followed by structured principal repayments. Terms are customised to align with revenue growth and cash flow improvements, ensuring manageable monthly payments throughout the loan term.