The question a revenue-stage software business should actually ask is not "debt or equity" but "what am I buying with the money, and which instrument is cheaper for that specific purchase?" Venture debt and a fresh round both put cash on the balance sheet, but they are priced in completely different currencies. A round is paid for in ownership. Venture debt is paid for in interest, fees and a small slice of warrants. When the cash is buying time to hit a defined milestone that will reprice the equity upward, debt is almost always the cheaper purchase. When the cash is buying open-ended runway with no milestone in sight, debt is a trap.
The dilution arithmetic is the whole argument
A growth round typically costs a founder team somewhere between 15 and 30 percent of the company. Venture debt costs the interest you pay over the term plus warrants, which in the UK market usually land in the region of half a percent to two percent of equity. That gap is the entire reason the instrument exists. If a £2m to £3m facility buys six more months of growth and you close the next round at a valuation a turn or two higher because of what those months delivered, the warrants are a rounding error against the dilution you avoided by raising at the old price.
The trap sits in the same arithmetic. Venture debt carries cash cost from day one. A typical structure runs three to four years with an interest-only period of roughly six to eighteen months, after which principal amortises monthly. A £3m loan moving from interest-only into a two-year amortisation schedule pulls something close to £100k a month out of the business while it repays. A company still burning cash has to service that out of either revenue growth or the round the debt was meant to bridge to. If that round slips, the amortisation lands on a business that is simultaneously running low on cash and trying to raise. That is the failure mode, and it is why lenders care more about the credibility of your next round than your current profitability.
How venture debt is actually structured
The market default is debt that sits alongside a recent equity round, not instead of one. Lenders price most comfortably in the window just after a priced round has closed, because the new investors have validated the valuation, refreshed the cash runway and signalled they will likely support the company again. Venture debt then extends that runway by a further three to six months without touching the cap table beyond the warrants.
The components a CFO should expect to negotiate:
- Term and amortisation. Three to four years, with an interest-only period up front, then monthly principal repayments. The longer the interest-only period, the more runway you buy before cash starts leaving.
- Warrants. The lender takes the right to buy a small equity stake, commonly half a percent to two percent, at the price of the round it lent alongside. This aligns the lender with your upside and is the mechanism that lets the cash price be lower than a pure commercial loan.
- Covenants. Often a minimum cash balance or a minimum revenue or ARR level, tested monthly. These are the terms that bite. A covenant set against your plan at closing tightens in practice as burn accelerates, and a breach can give the lender the right to accelerate repayment at the worst possible moment.
The covenant point is where files come unstuck after the deal is done, not before it. Founders read the covenant table once at signing and never again, then trip a minimum-cash test two quarters later because the plan slipped. Reading those tests against your live cash forecast every month is not optional housekeeping; it is the difference between venture debt extending your runway and venture debt shortening it. Bedrock places these facilities for revenue-stage software businesses through cashflow loans and specialist venture-debt funds, and monitors the covenant headroom for clients still inside a structure. The broader picture for how recurring-revenue businesses fund growth sits on the technology sector page.
When the round is the right call instead
Debt is the wrong instrument when there is no near-term event for it to bridge to. If the business is pre-revenue, deep in R&D, or growing into a market that will take years to prove, there is no milestone that reprices the equity inside the term of a loan, and no reliable cash to service amortisation. That is equity risk, and it belongs with investors who are paid in upside for carrying it. Asking a venture-debt fund to underwrite open-ended runway gets a polite decline, because the lender cannot see how it gets repaid except out of a round that may never happen.
Two other situations point to equity. The first is when the company needs strategic input, hiring reach or follow-on signalling that only a credible lead investor brings; debt buys cash and nothing else. The second is when the balance sheet already carries debt and adding more would leave no headroom for the next investor, who will look hard at how much of their fresh capital is going to service borrowings rather than fund growth. Stacking debt on debt ahead of a raise can actively depress the price the round closes at.
The cleanest read is this. If the cash buys a specific, datable milestone, and the business can service the repayments out of growth or a credible next round, borrow and keep your equity. If the cash buys time to figure out whether the business works at all, raise the round and pay in ownership, because that is the only currency that matches the risk. The expensive mistake is using the wrong currency for the purchase. Where the choice is genuinely close, the introduction to growth capital runs through Bedrock's equity work, and the debt structures sit alongside it rather than competing with it.