Private credit encompasses privately negotiated debt financing for companies not tapping public bond markets—including venture debt, asset-based loans, and direct lending from specialized funds.

How it works

Lenders evaluate cash flow, collateral, or investor support rather than pure equity upside. Venture debt often couples term loans with warrants and ties to recent equity raises. Covenants may restrict additional debt, M&A, or cash burn thresholds. Prepayment penalties protect lender yield if companies refinance early after equity rounds.

Private credit funds raise LP capital targeting interest income with lower upside than VC. Startups blend equity and credit to reduce dilution while funding growth between rounds.

Why it matters

• Founders: Debt complements equity when growth is predictable enough to service payments—misuse during product-market fit search creates distress.
• Investors: Credit exposure diversifies LP portfolios; GPs offering credit must avoid conflicts with equity portfolio companies’ cap structures.

Common mistake

Treating venture debt as “free money” because it avoids immediate dilution—repayment, covenants, and warrant dilution still carry real cost.

Related ideas

See venture debt, subscription line, and structured equity.