Guide to Raising Debt

Raising debt capital requires a highly specific, technical skillset—one that most boards, founders, and finance leaders simply don’t possess. Yet, when the time comes to raise funds, you’re suddenly expected to navigate complex financial decisions with serious implications, often while resource-constrained and focused on other core business priorities.

Understanding the lifecycle of a debt raise is critical for securing the capital you need at the terms you want and remaining in your lenders’ good graces.

Preparing for your capital raise

Before meeting lenders or signing term sheets, there’s a lot of work that goes into preparing for your capital raise: clarify why you need debt, choose which type fits you best (and consider key business impacts like repayment length and cost of capital), decide how much to borrow, and organize your finances. By investing enough time into your preparation, you’ll not only increase your chances of securing financing on the best terms, but you’ll also set your company up to use that capital effectively.

Understanding why you need debt capital

Before getting started, ask yourself: Why are we seeking debt funding? There are many good reasons to raise capital—fueling growth, financing large purchases, or bridging a project gap. Debt can be a powerful tool if you have a clear pathway to consistently pay it back.

But just because you’re in need of cash doesn’t mean you should be raising debt capital. Avoid raising debt if you lack a realistic payback path or are in financial trouble—piling on loans can substantially increase your risk of bankruptcy if your balance sheet is already stressed.

It’s usually best to pursue debt from a position of relative strength so it accelerates growth rather than serving as a short-term capital infusion to keep you afloat. Investing funds into a new product or go-to-market strategy can make more sense coming from equity investors instead of a lender.

Once you’ve decided that raising debt is the way to go for your capital needs, it’s important to understand that lenders are primarily concerned with getting their money back (with interest). As a result, use of funds becomes crucial. Be ready to articulate exactly how the debt will be used and how it will help your business grow or become more efficient. Notably, your pitch to lenders will differ significantly from a bull case presented to equity investors.

Types of debt capital available

Various debt options exist; choosing the right type depends on your business needs and stage.

If you’re planning on raising capital as a private company, you’re likely to encounter the following debt options:

• Term loans: Lump-sum loans repaid on a set schedule, often requiring stable revenue or collateral. Good for predictable, long-term investments or expansions.
• Venture debt: Designed for venture-backed startups with high growth potential. Often interest-only at first, plus a principal bullet or warrants. Extends runway without heavy dilution but requires strong metrics.
• Asset-backed loans (ABL): Secured by assets such as receivables or inventory, tying borrowing capacity to collateral value. Can have lower rates but may require personal guarantees or allow asset seizure if you default. Often used for working capital.
• Lines of credit: Revolving facilities that charge interest only on drawn amounts. Ideal for seasonal needs or short-term gaps.
• M&A financing: Capital for acquisitions using senior debt, mezzanine loans, seller financing, or equity. Structures vary based on risk, cash flow, and deal terms.
• Revenue-based financing (RBF): Capital advanced upfront and repaid as a percentage of future revenue, with payments that flex with business performance.

Other forms of debt include equipment leases and government-backed loans (such as U.S. SBA 7(a) loans, which can reach up to $5M for small businesses).

Each of these loan types serves different use cases. For example, startups with strong recurring revenue but cash burn may favor venture debt or RBF, while asset-heavy, cash-flowing businesses may be better suited to bank term loans or ABL facilities.

Each debt type also comes with distinct costs and rules—often referred to as covenants. Venture debt may accept higher risk in exchange for warrants, while bank loans may offer lower rates but stricter qualification criteria and tighter covenants. Understanding these tradeoffs helps you target the right lenders and set realistic expectations.

Evaluating how much debt to raise

One of the toughest questions is: How much debt should we actually take on?

When raising debt capital, more is not always better. You should borrow enough to meet your needs without putting undue strain on your repayment capacity.

Lenders often evaluate metrics such as debt service coverage ratio (typically 1.25× or higher) and burn rate, which should allow for nine or more months of runway. In venture-backed companies, it’s common to raise venture debt equal to roughly 20–40% of the most recent equity round. Last year, venture debt fundraising surpassed $53B, marking a record year.

Unlike equity investors, credit investors are primarily focused on repayment—even if that means taking adverse actions to recover capital.

How covenants can impact your capital raise and business growth

Debt agreements include covenants—rules that specify what borrowers can and cannot do. Breaching a covenant can trigger default, forced repayment, or collateral seizure, so it’s critical to agree only to covenants you can realistically maintain.

While lenders may technically have the right to force bankruptcy, many prefer to work with borrowers to avoid that outcome. Choosing a lender with a strong reputation for flexibility can matter as much as pricing. In some cases, paying a slightly higher interest rate for looser covenants is well worth it.

There are three main types of covenants to watch for:

Affirmative covenants require borrowers to take specific actions throughout the life of the loan. 
Example: Maintain a minimum debt service coverage ratio.

Restrictive (negative) covenants prohibit certain actions that could increase lender risk. 
Example: Limits on raising additional debt.

Maintenance covenants impose ongoing operational or financial requirements. 
Example: Maintain ownership structure or key management team.

Always compare term sheets holistically. For instance, a facility priced at Prime + 3% with no financial covenants may be safer than Prime + 2% with strict revenue targets and an all-assets lien.

What lenders look for when underwriting your business

Thinking like a lender gives you an edge. Ask yourself: If I were lending money, what would I want to see? Lenders typically evaluate borrowers across several core dimensions.

These are often called the 5 Cs of Credit: character, capacity, capital, collateral, and conditions. In short, lenders assess your reliability, repayment ability, financial commitment, pledged assets, and the purpose and environment of the loan.

Importantly, lenders evaluate your application relative to other borrowers competing for limited capital.

Key factors lenders examine include:

• Financial performance and metrics: Revenue growth, margins, cash flow, or (for startups) ARR and churn.
• Business model and industry: Recurring revenue and customer diversification reduce risk.
• Capital stack and backing: Reputable investors or meaningful owner equity signal confidence.
• Collateral and assets: Tangible assets can lower rates but increase seizure risk.
• Risk factors and mitigants: Transparency around risks builds trust.

Lenders want confidence that you’ll repay on schedule. A well-run company with solid metrics, a capable team, reasonable leverage, and appropriate collateral will meet most underwriting criteria.

Tip: Prepare a concise lender pack—a one-pager or short deck highlighting financials, growth, customers, and backers. This is standard for larger companies and equally valuable for smaller ones running a competitive process.

Different lenders prioritize different factors. Banks tend to focus on profitability and assets, while venture lenders emphasize revenue growth and investor quality. Tailor your pitch accordingly.

Common myths and misconceptions about debt financing

Myth 1: Debt is only for companies that can’t raise equity.

Reality: Many successful companies use debt to grow without dilution—only creditworthy businesses can access it.

Myth 2: You must be profitable to get a loan.

Reality: Many lenders focus on revenue trajectory, backing, or collateral.

Myth 3: Debt means losing control.

Reality: Debt does not require equity or board seats; covenants simply set boundaries.

Myth 4: Debt is too expensive in a high-rate environment.

Reality: Debt can still be cheaper than equity dilution if returns exceed interest costs.

Myth 5: You should max out any approved loan.

Reality: Over-leveraging strains cash flow—borrow only what you need plus a modest buffer.

How Arc’s solutions help in the pre-raise stage

Arc’s suite of capital management tools helps you plan and execute your raise from day one.

• Arc offers free capital assessments to qualifying businesses, analyzing your financials to estimate sizing, pricing, structure, and duration.
• Model different funding scenarios to understand runway and covenant headroom.
• Consolidate financial data in one platform for easier lender readiness and sharing.
• Receive guidance on the most appropriate type of debt for your business.
• Get a tailored list of lenders aligned with your capital needs.
• Prepare lender-ready marketing materials—similar to what an investment bank would provide.

Using Arc during the pre-raise phase helps you enter the process organized, informed, and aligned with lender expectations.

Think of us as an extension of your team.

“Arc was a game-changer for us. Their team cut through the noise, matched us with the right venture-debt partners, and delivered a competitive term sheet in just ten days.” 

— Stefan Katanic, CEO, Veza Digital