Sheel Mohnot’s recent LinkedIn post on venture debt reminds us that borrowing money isn’t just about asking nicely and hoping for the best. It’s a game—one where the rules aren’t always clear, and the stakes can be high. Venture debt is a powerful tool, but only if you know how to wield it without setting your business on fire. From navigating lender demands to keeping your equity backers calm, the art of borrowing is part strategy, part psychology, and part common sense. In this article, we’ll dissect why debt isn’t as scary as it seems, how to keep your lenders happy (without selling your soul), and why trust is the real currency in these relationships. Borrowers, take notes—this is how you play to win.
The Capital Structure Balancing Act
Virtually any business seeking to accelerate cash velocity through commercial relationships assumes balance sheet risk. For savvy operators, this risk can be transformed into a financial product—a business model compensating an originator for taking on said risk. Surprisingly, many SaaS businesses, often considered asset-light, shoulder this risk more than they realize. This underappreciation has likely driven the demand for venture debt over other funding mechanisms.
Venture lenders, for simplicity, lend against a borrower’s corporate cash. It’s a popular tool for scaling but not the only one. Non-venture debt credit structures—like revenue-based financing or asset-backed lending—often offer greater flexibility and alignment with specific business models. These options are especially attractive for companies with predictable cash flows or unique risk profiles. The key is to tailor the financing structure to a business’s needs, requiring expertise, foresight, and a willingness to look beyond the obvious.
Transparency Builds Trust (and Prevents Catastrophe)
Debt covenants—mandatory conditions safeguarding lenders—are a near-universal feature of early-stage borrowing. These covenants can impose strict financial or operational requirements, and breaching them grants lenders significant leverage, from freezing accounts to demanding repayment. Though enforcement at this level is rare, the mere possibility underscores the importance of understanding these agreements.
Transparency and trust are the bedrock of any successful borrower-lender relationship. Open communication and mutual understanding can prevent most breaches from spiraling out of control. Businesses with strong relationships are more likely to resolve issues collaboratively, whether through an equity cure (injecting additional capital) or by addressing lender concerns early. Without trust, even minor missteps can escalate into unnecessary turmoil.
Borrowers Must Control What They Can, When They Can
Borrowers should approach lender relationships with the same diligence they would apply to any high-stakes partnership. A lender’s reputation is often a clear predictor of future behavior—those known for aggressive wind-downs typically leave a verifiable trail through standard due diligence. Research thoroughly, ask pointed questions, and understand the lender's approach to challenges.
Equally critical is evaluating the stance of equity backers on debt. How they respond to financing decisions is a reliable signal of their behavior in moments of financial distress. This nuanced, often-overlooked dynamic can significantly influence outcomes when the unexpected occurs.
Ego, misalignment, and poor communication are the enemies of resolution, capable of turning manageable issues into existential threats. Borrowers must proactively address potential risks, aligning all parties early and often. Success lies in doing the work upfront—establishing trust, creating contingency plans, and maintaining open communication—rather than waiting for a covenant breach or maturity date to force action. Control what you can now to prevent preventable crises later.
Unsolicited Advice for Borrowers (and Their Backers)
Borrowers must approach lender relationships with strategy and rigor, treating lenders as collaborative partners rather than overseers. It’s essential to align expectations: lenders seek debt-level returns for reduced risk, not equity-level exposure without commensurate rewards. Borrowers can build trust by fostering open communication, sharing performance updates consistently, and addressing potential issues proactively. Trust is cultivated in calm times and fortified in crises, making early and transparent dialogue invaluable. Equally, borrowers must rigorously evaluate their financing options before signing a term sheet. Non-venture credit structures, such as revenue-based financing or asset-backed loans, may offer more flexibility or alignment with specific growth strategies. Engaging debt capital markets advisors early can help structure tailored solutions, ensuring alignment with business objectives.
Debt itself is neither inherently good nor bad; its value lies in how it’s structured and the strength of the relationships it fosters. Borrowers who view lenders as strategic allies, explore diverse financing avenues, and maintain alignment with both lenders and equity backers can fully unlock the potential of credit. By preparing meticulously, communicating openly, and fostering alignment across stakeholders, operators position themselves not just to scale effectively but to navigate challenges with agility and confidence. This approach minimizes risk, maximizes opportunity, and transforms debt from a potential obstacle into a powerful tool for growth.