What is venture debt and when does it make sense for UK startups?

stellapenso

I was reading about venture debt the other day and wanted to check I have understood it properly, because most of what I find is either written by lenders promoting their own products or assumes you already know how a funding round works. Here is what I have pieced together, and I would appreciate anyone correcting me.

Venture debt seems to be a type of loan aimed at startups that have already raised equity from venture capital investors but are not yet profitable, so a traditional bank would normally turn them down. It is usually offered as a term loan over two to four years, often with an interest-only period at the start, and the lender typically takes warrants, which give them the right to buy a small amount of equity later. The idea appears to be that it extends runway between equity rounds without giving up as much ownership as raising more shares would.

The attraction for founders looks like less dilution and a longer runway, which can help a company reach a milestone before the next raise and so secure a better valuation. The downside is that it has to be repaid regardless of how the business performs. I keep seeing covenants mentioned, such as minimum cash balances or restrictions on taking on other debt, along with security over company assets and sometimes a charge registered at Companies House. I am unsure how lenders view a company that misses a covenant, or what happens if the next equity round slips and the repayments start to bite.

My question is how founders decide whether venture debt is worth it compared with simply raising more equity or using a convertible loan or ASA, and at what stage it becomes realistic. I would also like to know how much a company should borrow relative to its last round, how the warrants and fees affect the true cost, and how equity investors in the UK tend to view debt on the cap table. I have read something similar to this on Entrepreneur Plus, so I would like to hear from anyone who has taken it on, how the terms were negotiated, and whether it caused any friction during a later raise.