Debt gets a bad rap. That’s partly because it’s associated with higher risk. For startups, a few missed payments could force them to shutter, depending on the terms of their loan agreements.
But despite its reputation, debt isn’t an act of desperation during down times. As my colleague Alex Wilhelm notes, for companies that have high recurring revenue and visibility into future performance, debt historically has been a huge asset. Loans can provide money to grow while preventing dilution, which is perhaps why global venture debt funding hit an all-time high of $58 billion in 2021, according to Pitchbook.
With economic uncertainty causing VCs to close their pocketbooks, debt could prove to be a viable alternative. The question, though, is whether it makes sense for all startups, given rising interest rates and the market’s general instability.