Venture debt glossary:
Your guide to venture debt vs venture capital
Understanding the language of lenders is the first step to securing capital. This glossary defines the key financial metrics, loan structures, and risk factors used by over 100 lenders in the Butterfi network.
Loan structures & mechanics
These terms define the types of financing available and the specific mechanics of how money is drawn and repaid.
Term Loans
Traditional loans with a fixed repayment schedule and interest rate.
Revenue-Based Finance
A loan repaid as a percentage of revenue over time, usually until a repayment cap (e.g., 1.3x–1.5x principal) is reached or until an agreed date.
Revolving Credit Line
A flexible loan allowing borrowing, repayment, and re-borrowing up to a set limit, subject to agreed terms and conditions.
Multi-Draw Loan
A loan allowing multiple drawdowns up to a total limit during the availability period, usually with minimum draw amounts.
Marketing Finance
Financing used specifically for marketing spend, typically tied to cohort performance and campaign ROI. Often suited for companies spending $100k+ monthly on marketing.
Interest-Only Period
A period when only interest is paid, not principal. Common in venture loans schemes.
Warrant Coverage
The lender’s right to purchase equity as part of the loan, commonly required in venture lending.
Non-Recourse
A loan where the lender cannot claim personal or additional company assets beyond agreed collateral. Common in venture debt structures.
Unsecured Debt
Debt not backed by specific assets.
Key Financial Metrics
The numbers lenders analyze to determine the health and stability of your business.
Recurring Revenue (ARR / MRR)
Stable, predictable revenue generated on a recurring basis.
Gross Margin
Profit remaining after delivering the product or service. Software-focused lenders often require margins of at least 70%.
Cash Runway
Months you can operate before running out of cash, assuming no new funding. A runway below four months is often considered distress and may attract special-situations lenders.
Runway Quality
Not just months of runway, but clarity on profitability timing and future funding plans.
Growth Rate
How fast revenue grows month-over-month or year-over-year. Higher growth often signals stronger equity fundraising potential and lower credit risk.
Liquidity Position
Cash on hand plus binding access to additional funding sources.
Path to Profitability
A clear plan showing how and when the company reaches breakeven. Lenders typically expect breakeven before loan maturity in order not to rely on additional funding.
Revenue Visibility
How predictable your future revenue is sometimes more important than current revenue.
Risk & Underwriting Factors
The specific red flags and green flags lenders look for during due diligence.
Credit Risk
The risk that a borrower cannot repay a loan as agreed, through missed payments or default. Different lenders analyze different metrics and weightings to assess credit risk.
Leverage
In venture debt, this is often measured by the debt size relative to annual revenue, indicating the borrower’s ability to service debt. Higher leverage implies higher lender risk.
Customer Concentration
A situation where a few customers account for more than 50% of revenue, creating elevated credit risk for lenders.
Channel Concentration
A situation where a few distributors account for more than 50% of revenue, increasing lender credit risk.
Customer Base and Retention
The quality, diversity, and retention of customers, including churn risk. Strong retention improves resilience if some customers are lost.
Product Stickiness
How consistently customers return and remain engaged with the product.
Sponsor Support
Willingness of equity investors to provide follow-on capital. Strong support increases lender confidence and perceived runway.
Geographic Presence
Where a company operates, is registered, generates revenue, or is headquartered. Many lenders finance only companies with significant local presence.
Legal Terms & Covenants
The contractual obligations that protect the lender.
Financial Covenants
Financial ratios that, if breached, may trigger loan acceleration (e.g., minimum liquidity, maximum leverage). Many tech lenders impose no financial covenants.
Covenant Headroom
The buffer between current performance and lender-required thresholds.
Loan Acceleration
A lender’s right to demand early repayment following covenant breaches or material contractual violations.
Default Interest Rate
A pre-agreed interest rate charged from default until the breach is cured.
Early Repayment Clause
A contractual arrangement of periods during which the borrower can repay the debt before its maturity, and the associated fees.
Debt Restructuring
Changes to existing loan terms, including maturity or seniority. Often triggered by repayment difficulties or new debt issuance.
Company Types & General Terms
Bootstrapped Startups
Companies funded entirely by founders without external investment. Many debt funds target such companies which prefer non-dilutive capital.
VC-Backed Companies
Startups funded by venture capital investors. Often eligible for venture loans if the last equity round was recent.
Use of Funds
A detailed plan for how and when borrowed funds will be used. Sometimes contractual, sometimes indicative only.
Refinance
A financing transaction in which the borrower uses some of the funds to repay existing loan/s.
Monthly-Based Financials
Monthly financial reporting used by lenders to assess momentum, seasonality, and stress-test forecasts.