Debt financing can extend your runway without diluting equity, but only if you know how to use it. Here's when debt financing makes sense for your startup, which types to consider, and how to actually qualify.
What is debt financing for startups?
Debt financing for startups is money you borrow and repay with interest on a set schedule. You keep equity, but you take on a legal repayment obligation.
Common forms include bank loans, SBA loans, lines of credit, equipment loans, invoice financing (A/R financing: not factoring), and venture debt.
Why founders care: Debt can extend runway, smooth cash flow, and reduce dilution when markets are tight or valuations are soft.
Note: Want a primer on valuation first? Read our blog post about startup valuation methods for more on the topic.
Example of debt financing
A startup raises $15M Series A. It secures $4M in venture debt (about 27% of the round). The loan is interest-only for 9 months, then 24 months amortization. The team uses the facility to hire sales, finish a feature, and reach the metrics needed for a higher-valuation Series B.
Debt vs. Equity: When does debt make sense?
Use debt when your revenue is predictable, your unit economics are improving, or you just closed equity and want to reach the next milestone without more dilution. Debt can extend runway and improve negotiating leverage before the next round.
Choose equity when you need risk capital for long R&D cycles or when cash flow is too volatile to support fixed payments.
Note: If you are exploring runway extensions without dilution, read our What is venture debt? post next.
Types of debt financing for startups explained
Just as every startup is unique, so are their financial needs. Luckily, debt financing offers a diverse range of options to cater to those specific requirements. Let's take a closer look at some of the most common types of debt financing available to startups.
Bank loans
Banks offer various loans for startup financing, each with its own terms and conditions. Let’s look at two of those bank loan options:
- Traditional term loans: These are the standard loans. A startup borrows a fixed amount of money and repays it with a fixed interest rate over a set period. They are a reliable option for funding significant investments like real estate.
- Small business administration (SBA) loans: These loans are backed by the U.S. government and are specifically designed for small businesses and startups.
SBA loans generally have more favorable terms, such as lower interest rates and longer repayment periods, making them a popular choice for businesses that qualify.
Lines of credit
Think of these as a financial safety net for your business. These are two of the most common ones:
- Revolving credit lines: These are similar to credit cards. These loans allow you to borrow up to a specific limit, use what you need, and only pay interest on the amount borrowed. They offer flexibility for managing ongoing expenses or unexpected costs.
- Business credit cards: These cards provide similar benefits to revolving credit lines. They often come with additional perks like rewards programs or cash back. However, they typically have higher interest rates than other lines of credit.
Equipment financing
If your startup needs specific equipment to operate or grow, this financing option is tailored for you. Let’s put two equipment financing loan options under the lens:
- Loans for purchasing equipment: These loans are designed explicitly for acquiring equipment. The equipment itself serves as collateral. This can make them easier to qualify for, and they come with competitive interest rates.
- Leasing options: If you prefer not to purchase equipment outright, leasing can be a viable alternative. It allows you to use the equipment for a set period while making regular payments, making it more affordable for some startups.
Invoice financing
For businesses dealing with unpaid invoices, invoice financing can be a lifeline. Let’s look at a popular invoice financing alternative:
- Accounts receivable (A/R) financing: This is a loan secured by your outstanding invoices. You retain control over collections and customer relationships. (Not to be confused with invoice factoring, which is a sale of receivables and not debt.)
Venture debt for startups
This type of financing is geared toward high-growth, venture-backed startups and typically comes from specialized venture lenders offering non-convertible term loans.
- Loans from specialized venture lenders: Venture debt is a non-convertible term loan (often paired with warrants) used alongside equity to extend runway without further dilution. Rates and fees reflect the higher risk profile of early growth companies.
Note: Ready to go deeper? Read our Venture debt terms post so you know exactly what you are signing.
What debt really costs: Terms you should know
Here’s a quick look at some common terminology you should be familiar with:
- Interest rate: Often tied to prime or another base rate plus a spread.
- Repayment profile:
- Amortized: Level payments of principal and interest.
- Interest-only to a bullet or to amortization: Interest-only for a set period, then a lump sum or stepped principal.
- Fees: Origination, facility, draw, prepayment, and end-of-term fees.
- Covenants: Minimum cash, ARR, or burn requirements; reporting obligations.
- Warrants: Small equity kicker on some venture debt deals.
Note: Selling to other SaaS companies and waiting on receivables? Read our piece on SaaS debt financing to combine A/R tools with growth debt.
How to get debt financing for your startup
Debt financing can give your startup the capital needed to fuel growth and expansion. But navigating the process can seem daunting. Here's a step-by-step guide to help you secure the debt financing your startup needs.
1. Prepare your business plan
A solid business plan is your roadmap to success and is essential for securing debt financing. Lenders will want a clear plan showing your business model, market opportunity, and financial projections.
Be sure to include key components such as an executive summary, company description, market analysis, marketing and sales strategy, financial projections, and a description of your management team and their qualifications.
2. Assess your financial health
Before approaching lenders, take a deep dive into your startup's financial health. Review your personal and business credit scores, as these will be a significant factor in lenders' decisions.
Analyze your financial statements. This includes your income statement, balance sheet, and cash flow statement. The goal is to give lenders a snapshot of your startup's financial performance.
Remember to create a detailed budget to track your income and expenses. This budget will also highlight your financial responsibility and help you project future cash flow needs.
3. Identify the right lender
Research and compare different lenders. Try to find one specializing in financing startups that align with your needs.
Consider factors such as the types of loan products they offer, their interest rates, repayment terms, and reputation. Look for lenders with a track record of working with startups and offering flexible terms.
4. Gather necessary documentation
Be ready to provide lenders with various documents to assess your loan application.
These typically include your most recent financial statements, such as income statements, balance sheets, and cash flow statements. They also include personal and business tax returns for the past few years and the business plan we mentioned earlier.
Depending on the lender's requirements, you might also need to provide a personal guarantee and additional documents, such as legal documents, permits, or licenses.
5. Submit your application
With your documentation in order, carefully review your application before submitting it to the lender.
Make sure all information is accurate, up-to-date, and presented professionally. You should also highlight your startup's strengths and potential for success. Be prepared to answer any questions the lender may have about your business or loan request.
Common pitfalls to avoid include incomplete or inaccurate information, unrealistic financial projections, and a lack of preparedness to discuss your business in detail. This is why being thorough and transparent is so important.
6. Negotiate terms
Upon loan approval, carefully review the lender's terms, including the interest rate, repayment schedule, and any fees.
Don't hesitate to negotiate for more favorable terms. But be realistic and respectful. Aim for the lowest possible interest rate, a repayment schedule that aligns with your startup's budget, and minimized fees.
Tips for acquiring debt financing successfully
So far, we’ve explained what debt financing for startups is and how to get it. Now, here are a few tried-and-true tips that can pave the way to success:
- Build a strong credit history: Lenders want to see a track record of responsible borrowing and timely payments. This applies to both your personal and business credit scores. Pay your bills on time, keep your credit use low, and avoid negative marks on your credit report.
- Keep transparent and organized financial records: Lenders want to see a clear narrative of your financial performance. Keep meticulous records of your income, expenses, assets, and liabilities.
- Show a clear path to profitability: Lenders are more likely to invest in startups with a viable business model and a clear path to profitability. Develop a complete financial forecast. It should outline your expected revenue, expenses, and profitability over time.
- Seek advice from financial advisors or mentors: They can help you understand the different types of debt financing available and assess your startup's financial needs.
Note: If you are weighing inside bridges and valuation resets, read our post on Down round before you choose your mix.
FAQs
What is debt financing?
Debt financing is borrowing money that you repay with interest on a schedule, without selling equity. Examples include bank loans, SBA loans, lines of credit, equipment loans, invoice financing, and venture debt.
What is debt funding?
Debt funding is another phrase for debt financing. It refers to raising capital through loans or credit instruments instead of equity.
What is debt financing for startups?
Debt financing for startups is a loan-based capital option designed for early or growth-stage companies. It helps extend runway, reduce dilution, or finance working capital when your metrics support repayment.
Is invoice financing good for a startup?
Yes, because invoice financing can help a B2B startup turn receivables into cash. It costs more than bank lines, so use it when you have strong invoices and need cash quickly, or pair it with a line of credit.
Next steps with Orb
You should now have a better understanding of what debt financing is for startups. You should also know that lenders are more likely to approve loan applications from startups that show a consistent cash flow.
One key aspect of maintaining a healthy cash flow is having a robust billing system. A well-oiled billing system ensures timely invoicing, accurate payment processing, and management of late payments.
That's where Orb comes in.
Orb is a done-for-you billing management platform. It’s designed to simplify your billing processes. Whether you're struggling with dunning, usage tracking, or invoicing, Orb has you covered. Here’s how Orb helps:
- Define your own billable metrics, built on raw event data. Use the Orb SQL Editor or a visual editor to do this without engineering.
- Run Orb Simulations on historical data to preview revenue and usage outcomes before launch. Orb enables forecasting so finance and product teams can make more informed decisions.
- With Orb RevGraph, usage data is decoupled from pricing logic, so invoices remain accurate and up to date as you iterate on pricing.
- Orb reduces billing errors by turning raw usage data into fully auditable invoices. As you evolve pricing, invoices are automatically recalculated to remain accurate.
- Direct integrations help sync usage and revenue data across your systems.
Orb lets business teams build new pricing plans, test strategies with historical data, and launch changes without constant engineering support. See Orb’s flexible pricing options to find a plan that matches your business needs.
