Your Complete Guide to Cash Management (Part 2): How to Negotiate Your Venture Debt
February's three part series on cash management for tech startups
Venture Debt is a loaded term. It can mean different things to different startups. And it can come in all different shapes and sizes.
The two most common structures are Revolving Lines of Credit and Term Loans.
Think of Revolvers like giant credit cards, where you can run up a balance, pay it down, and then run it up again - just remember to stay below the limit.
Revolvers are great for short term needs, like spikes in payroll (bonus season), big vendor pre payments, and working capital needs (stocking inventory to prepare for busy season - not that I’d know; I’ve never sold anything you can touch, lol).
On the other hand, Term Loans are like a big whack of cash generally reserved for larger priced items, like, say, another company.
Term Loans are more like a mortgage than a credit card. You can prepay it to make it go away, like a mortgage, if you fall ass backwards into excess cash (I’ve done this after raising an equity round).
In my simple mind, Revolvers are great to smooth for fluctuations in the natural course of the business, while Term Loans are great for preserving equity and avoiding dilution on bigger commitments.
It’s common for companies to set both structures up in tandem, and have the flexibility to pick which one to use based on the scenario they’re faced with. They’re both insurance policies in a sense - you don’t need them until you really fucking need them.
This is our second of three posts on cash management.
Part I: Bank Accounts (LAST WEEK’S POST)
Stages Covered:
Startup
Growth
Maturity
*Redflags*
Investment Policy Template you can download
Part II: How to Negotiate Your Venture Debt? (THIS WEEK’s POST)
Revolvers vs Term Loans
Fees
Typical Debt Covenants
Negotiation Points
Venture Debt Players and Sizing
*Red Flags*
Part III: 13 Week Rolling Cash Flow Forecast (NEXT WEEK’s POST)
How cash enters the building
How cash leaves the building
13 week forecast template you can download
In this post we’ll give you illustrative examples, break down the key differences between the different types of venture debt, define common terms, cover the big players to be aware of, provide negotiating tips (from real world experience setting them up myself), and call out some red flags.
Subscribe now, or you’ll breach your onerous debt covenants.
Revolvers:
Flexibility: A revolving line of credit operates similarly to a credit card. It offers a maximum credit limit, and the borrower can draw funds up to that limit as needed.
Reusability: As the borrower repays the borrowed amount, that amount becomes available to be borrowed again, making it a flexible financing option for short-term or recurring funding needs.
Interest: Interest is charged only on the amount borrowed and utilized. It provides flexibility in managing cash flow as the interest expense can be minimized by repaying the borrowed funds promptly.
Renewal: Typically, revolvers have expiration dates after which they might need to be renewed or renegotiated based on the lender's terms and the borrower's creditworthiness.
I’d like to emphasize the Renewal portion here - it’s common for companies to “upsize” or increase their effective credit limit over time. I’ve worked with startup friendly banks like SVB who build this into their strategy - they want to creep up the size of the Revolver as you become more successful and have the capacity for more debt. In this sense they share in the success of your business by getting their foot in the door early with a small Revolver (e.g., $2m) and upsizing it upon renewal over time as the company hits important financial milestones (Boom! Five years later it’s $200m).
Banks are building a portfolio similar to VCs - they bet on companies early and take on risk to hopefully grow with the business when it will produce larger returns. The SVBs and PacWest’s of the world loan smallish amounts that a big bank wouldn’t get out of bed in the morning to write, and then participate in the upside years down the line as the relationship stays intact.
Some of this is done through a genuine growth in trust (“you bet on us early in our company lifecycle and we appreciate that”). And some of it is achieved through terms which we’ll cover below, which allow banks to get their talons in, and box potential competitors out.
Term Loans:
Fixed Amount: A term loan provides a lump sum of capital upfront, which the borrower repays over a specified period in regular installments.
Repayment Structure: Term loans have a fixed repayment schedule, often monthly or quarterly, consisting of both principal and interest payments.
Usage: Unlike a revolver, once a term loan is repaid, the funds are not reusable. It provides a one-time infusion of capital for specific purposes like expansions, acquisitions, or long-term investments.
Interest: Interest is typically calculated based on the outstanding balance of the loan and is paid along with the principal in each installment.
Term loans are great for M&A, or as a bridge to a future rounds. These are the two most common cases, which we’ll elaborate on below. Term loans might also be used for construction projects (like an office build), or even paying down other debt that’s coming due (LOL, how meta - debt to pay down debt).
In terms of M&A, for a growing company with increasing equity value, it makes little sense to crush the cap table when you can conjure up more cash for the deal through a term loan.
I’ve personally used Term Loans when rates were super low (under 5%) and our equity value was growing more than 25% year over year as our valuation grew. It was a no brainer to use cheap debt, rather than expensive equity, to fund an acquisition.
In less favorable macro scenarios where it doesn’t make sense to raise equity funding, or when the company isn’t performing well enough to get the valuation it wants, Term Loans can be an effective “bridge” to the next funding event. Why do a down round when you can delay catalyzing your valuation reality?

In terms of size, lenders will typically provide 1/5th of of whatever you have on your balance sheet already, 25% to 35% of the last equity round.
OK, let’s compare and contrast, and then teach you some crucial negotiating points.