AS | Ankit Sarawagi|Founder, CFOmatrix·June 2026·8 min read | Updated Jun 2026 |
- Take venture debt from strength (you still have 6+ months of cash), not desperation. The best time to borrow is when you do not need it.
- Right-size it: about 10 to 30% of your last equity (or 30 to 50% of ARR), enough to add 6 to 12 months of runway.
- Benchmark the terms: interest ~13 to 18%, warrants 0.1 to 2% fully diluted, processing fee 1 to 2%, and an interest-only moratorium of 3 to 6 months.
- It only makes sense if the capital funds growth that returns more than ~15% (a higher next-round valuation). If it just plugs a hole, skip it.
| 10-30%of your last equity raise (right size) | 6-12 moof runway it should add (not 2 to 3) | 13-18%typical India interest rate |
Debt does not compete with the cash in your bank. It competes with the equity you would otherwise sell. Equity is the most expensive capital a startup raises, so if you grow, borrowing is usually far cheaper than dilution. That is why healthy companies with cash still raise debt.
Test 1: Timing, Are You Borrowing From Strength?
Lenders give the best terms to companies that look strong, so the time to raise debt is before you need it, not when the bank balance is low.
- You still have at least 6 months of cash (you are not desperate)
- You are raising alongside or just after an equity round, or you have strong, steady revenue
- You have a clear growth use that will lift your next-round valuation
- You want it as insurance and optionality (protection from a forced down round later)
Test 2: Sizing, Is the Facility the Right Size?
A facility that only adds a few weeks is the classic mistake. Properly sized, venture debt buys you real milestones.
- Facility is about 10 to 30% of your last equity raise (or 30 to 50% of ARR)
- It extends runway by 6 to 12 months (if only 2 to 3, it is too small or burn is too high)
- Those extra months let you hit specific milestones (revenue, users, a product line) that raise valuation
Test 3: Terms, Are the Numbers in Market Range?
Benchmark every line of the term sheet. The headline interest rate is only part of the cost.
| Term | India benchmark |
|---|---|
| Interest rate | ~13 to 18% p.a. |
| Moratorium (interest-only) | 3 to 6 months (ideally 6 to 12) |
| Warrants (equity kicker) | 0.1 to 2% fully diluted (5 to 20% coverage) |
| Processing fee | 1 to 2% (also check any end-of-term fee) |
| Tenure | 12 to 36 months |
Test 4: Affordability, Can You Service It?
- You can comfortably pay the interest (then principal) even if growth slips 20 to 30%
- Covenants (minimum cash balance, restrictions) are livable and clearly understood
- The security/charge (assets or IP) and any cross-default with your equity documents are reviewed
Test 5: The Use Test, Does It Actually Make Sense?
- The capital funds something that returns more than ~15% (growth that lifts your next valuation)
- You are not just plugging a hole with no path to the next round
- You have modelled the all-in cost of debt (interest + warrants + fees) against the dilution cost of equity
It only buys 2 to 3 months with no valuation uplift, you are raising from desperation, you cannot comfortably service the payments, or there is no realistic path to the next round. In those cases, debt makes a bad situation worse.
Borrow from strength, not desperation. If you would only take it because you are running out of cash, that is the one moment you should not.
Free Tools: Run Your Own Numbers
Two free Google Sheets to make this concrete. Make a copy and plug in your numbers.
Venture Debt Readiness Checklist The five tests above, as a tick-box sheet | Open the checklist |
Equity vs Debt Dilution Calculator Compare the cost of dilution vs the all-in cost of debt | Open the calculator |
Frequently Asked Questions
When should a startup take venture debt?
From a position of strength: when you still have 6 or more months of cash, are raising alongside or just after an equity round (or have strong steady revenue), and have a clear growth use that will lift your next-round valuation. The worst time is when cash is nearly gone, because that is when you have no leverage.
Should I take debt if I still have cash in the bank?
Often yes. Venture debt competes with the equity you would otherwise sell, not the cash in your bank. The best time to borrow is when you do not desperately need it, because lenders give the best terms to strong companies, and it protects you from a forced down round later.
How much venture debt should I take?
About 10 to 30% of your last or recent equity raise, or roughly 30 to 50% of ARR, sized to extend runway by 6 to 12 months. If it only adds 2 to 3 months, it is sized too small or your burn is too high.
What is a good interest rate and warrant for venture debt in India?
Interest is usually about 13 to 18% per year. Warrants are typically 0.1 to 2% fully diluted (or 5 to 20% coverage), with a processing fee of about 1 to 2% and an interest-only moratorium of 3 to 6 months. Verify current market terms.
When is venture debt a bad idea?
When you are just plugging a hole with no path to the next round, when it only buys a few weeks with no valuation uplift, when you cannot comfortably service the payments if growth slips, or when you are raising from desperation.
General information, not financial advice. Rates, fees and terms vary by deal and over time. Model your specific burn, milestones and the full term sheet before deciding, and verify current market terms.
- Venture Debt in India: The Complete Founder’s GuideVenture Debt · Pillar
- Debt vs Equity Funding: When to Use WhichVenture Debt · CFOmatrix Series
- Venture Debt Cost in India: Interest, Warrants & FeesVenture Debt · CFOmatrix Series
AS | Founder, CFOmatrix | Finance Strategy & Equity Compliance CFOmatrix is a knowledge platform focused on how finance actually works inside growing companies. Every insight is shaped by real operating experience across startups and growth-stage companies, including cross-border setups. |