A term loan is debt capital funded in one or more tranches and repaid on a defined amortization schedule with interest, often used alongside equity in venture-backed companies.

How it works

Venture debt term loans typically run three to four years with interest-only periods early, then principal plus interest. Lenders may require warrants as kicker compensation. Covenants can include minimum cash, revenue milestones, or prohibitions on additional debt. Security often covers assets and IP; in downside scenarios debt sits senior to equity.

Growth-stage SaaS companies use term loans when metrics support predictable cash flow but founders want to avoid dilution. Buyout term loans are larger, often syndicated, and paired with revolvers in LBO structures — less common at seed stage.

Amounts scale with revenue or last equity round size; venture debt providers often lend a fraction of the last raise. Refinancing before maturity is common if performance improves.

Why it matters

• Founders: Term loans buy runway for hitting milestones before the next round. Default triggers can accelerate repayment and force distressed sales.
• Investors: Equity holders benefit from leverage in upside but bear first loss if the company struggles. Board should monitor covenant headroom quarterly.

Common mistake

Treating venture debt term loans as “free money” because they do not dilute immediately. Warrants, fees, and repayment drains cash that might have funded growth — the true cost includes opportunity cost of equity foregone vs raised.

Related ideas

See also venture debt, bullet maturity, warrant kicker, and unitranche.