TL;DR: A tranche is a portion of a larger financing facility that is drawn or funded separately, usually against agreed conditions. Splitting a facility into tranches lets a company access capital in stages rather than all at once, and lets a lender release funds as the business hits milestones.
A tranche is a slice of a committed financing facility. Instead of receiving the full amount on day one, the borrower draws capital in defined portions, each with its own timing and, sometimes, its own conditions.
The word comes from the French for "slice." It is used across debt and equity markets, but in venture debt it most often describes how a single facility is made available over time. A company might be approved for a total amount, draw a first tranche at closing, and access a second tranche later once it meets a revenue target or another agreed condition.
Tranching benefits both sides. The borrower avoids paying interest on capital it does not yet need, and the lender manages its exposure by releasing funds as the company's progress de-risks the loan.
A tranched facility specifies the total commitment, the size of each tranche, and what unlocks the later tranches. Common conditions include reaching an ARR threshold, closing an equity round, or hitting a defined operating milestone. Interest is typically charged only on the capital drawn, so an undrawn tranche does not start accruing interest until it is funded.
This structure suits growth companies whose capital needs scale with the business. It keeps the cost of capital aligned with deployment and gives founders a committed line to grow into.
Do I pay interest on a tranche I haven't drawn? Usually not. Interest generally accrues only on drawn capital, though some facilities carry a small commitment or standby fee on the undrawn portion. Terms vary by lender.
What happens if I don't meet the conditions for a later tranche? The later tranche may not become available, or it may be renegotiated. The capital already drawn is unaffected. This is why milestone conditions are worth reviewing carefully before signing.
Related terms: Term Sheet · Venture Debt · Growth Capital · Covenant · Interest-Only Period
