Companies with cleared products and contracted revenue often have a working capital requirement better served by debt than equity. Running that conversation alongside the equity process changes the equity negotiation; running it afterwards changes nothing, because the round is already priced.
Which part of the requirement is genuinely equity
Not every dollar a growing company needs is equity-shaped. Companies with cleared products and contracted revenue frequently have a working-capital requirement, tied to inventory, receivables or instrument roll-out, that is better matched to debt because it is backed by an identifiable, collectable asset rather than by unproven future growth.
The equity requirement, by contrast, is the capital needed to fund activity that has no near-term collateral value: product development, market entry, regulatory work and the operating losses that accompany early commercial scaling. Conflating the two and raising the entire requirement as equity dilutes founders and early investors for a need that a lender would fund on better terms.
Separating the two requires a granular use-of-funds exercise before either process starts, so that the equity raise is sized to the genuinely equity-shaped portion of the plan and the debt conversation is scoped to the working-capital portion from the outset.
Venture debt, revenue-based and royalty structures compared
Venture debt is typically the closest fit for a company that has raised an equity round recently and needs extended runway or growth capital without further dilution; it is usually senior secured, carries warrant coverage, and is underwritten against the company's cash position and investor support rather than against contracted revenue alone.
Revenue-based financing ties repayment to a percentage of monthly revenue rather than to a fixed schedule, which suits businesses with variable but growing top-line and no desire to add a fixed debt-service obligation during a period of uncertain cash flow; it typically costs more than venture debt on a like-for-like basis but carries less covenant risk.
Royalty structures, more specific to life sciences and medtech, exchange upfront capital for a percentage of future product revenue over a defined period or cap, and suit companies with a specific, identifiable revenue stream, such as a licensed or commercialised product, against which a lender can underwrite without needing security over the whole business.
What lenders need that equity investors don't
Lenders underwrite repayment, not upside, and they need a clear, collectable path to getting their capital back on schedule: contracted revenue, a borrowing base of eligible receivables or inventory, and covenants that give them an early warning if the plan slips. This is a fundamentally different underwriting question from the growth-and-return question an equity investor asks.
A term sheet from a lender will typically specify a borrowing base formula, minimum liquidity or coverage covenants, and reporting obligations that are more frequent and more granular than anything an equity investor requires, and a company unprepared for this level of financial reporting discipline will find the debt process slower than expected.
Warrant coverage aside, the lender's core question throughout is whether the collateral and cash flow support repayment in a downside case, not whether the company achieves its base case, and preparing materials that answer the downside question directly shortens the process considerably.
Sequencing the two processes without confusing either
Running the debt conversation alongside the equity process, rather than after it closes, allows the two to inform each other: a lender's willingness to fund working capital reduces the amount of equity capital required, which improves the terms achievable in the equity negotiation, because less capital is being asked for against the same business.
Running the debt conversation afterwards changes nothing, because by then the equity round is already priced and sized, and any subsequent debt facility simply extends runway rather than improving the terms the founders already accepted.
Sequencing correctly requires briefing both sets of counterparties on the existence of the other process, since lenders will ask about the equity round's structure and timing, and equity investors will want to understand any secured debt sitting ahead of them in the capital structure before they commit.
What warrant coverage actually costs
Warrant coverage grants the lender the right to purchase equity at a set price, typically calculated as a percentage of the loan facility, and its cost to founders is dilution that is deferred and contingent rather than immediate and certain, which makes it easy to underweight in negotiation relative to its eventual value.
The effective cost of a facility with warrant coverage should be calculated by combining the cash interest rate with the expected value of the warrant dilution at a plausible future valuation, not by looking at the interest rate alone, because two facilities with identical stated rates can have materially different total costs depending on warrant coverage and strike price.
Negotiating warrant coverage down, or negotiating the strike price up, is usually a more productive use of time than negotiating the headline interest rate, because warrant terms are often set with more room to move than lenders initially indicate.
Last reviewed February 2027
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